On the option pricing for a generalization of the binomial model

In the paper, we give an elementary proof of the fact that the option pricing within the model in which variation in stock prices belongs to a limited range is reduced to a similar problem in the binomial model. We also find a hedging strategy. The result obtained allows us to calculate the option price for the market with random number of variations in stock prices. The proof is given for the homogeneous model. The proof for the heterogeneous model is similar. Further, we consider the European call option. © 2000 Kluwer Academic/Plenum Publishers.