Option Pricing for the Transformed Binomial Class

This paper generalizes the seminal Cox-Ross-Rubinstein (1979) binomial option pricing model to all members of the class of transformed-binomial pricing processes. Our investigation addresses issues related with asset pricing modeling, hedging strategies, and option pricing. We derive explicit formulae for (1) replicating or hedging portfolios; (2) risk-neutral transformed-binomial probabilities; (3) limiting transformed-normal distributions; and (4) the value of contingent claims, including limiting analytical option pricing equations. We also study the properties of the transformed-binomial class of asset pricing processes. We illustrate the results of the paper with several examples