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Journal of Financial Economics Vol. 7 No. 3 1979

Option pricing: A simplified approach

John C. Cox1,2,3,4; Stephen A. Ross1,2,3,4; Mark Rubinstein1,2,3,4

1 Yale University · 2 Massachusetts Institute of Technology · 3 University of California, Berkeley · 4 Stanford University

Abstract

This paper presents a simple discrete-time model for valuing options. The fundamental economic principles of option pricing by arbitrage methods are particularly clear in this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Black-Scholes model, which has previously been derived only by much more difficult methods. The basic model readily lends itself to generalization in many ways. Moreover, by its very construction, it gives rise to a simple and efficient numerical procedure for valuing options for which premature exercise may be optimal.

DOI
10.1016/0304-405x(79)90015-1
Volume
7
Issue
3
Pages
229-263
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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