Rubenstein, Unscrambling the binary code, 1991

[WilliamY]

Where can I download classical papers? Thanks.

 

[Andy Nguyen]

It's Rubinstein, not Rubenstein. You can easily find the pdf version online or
QuantNetwork - Financial Engineering Forum - Downloads - Unscrambling the binary code

 

[WilliamY]

Thanks again Andy.

On the first page, how did d, one plus the payout rate, and r enter the log?

The textbook risk neutral approach has them outside the log.

What's the expression for S in terms of r and d?

 

[doug reich]

Thanks again Andy.

On the first page, how did d, one plus the payout rate, enter the option formula?

The textbook risk neutral approach does not have the d term.

Only because they take d=0; this is a more general case.

 

[WilliamY]

Only because they take d=0; this is a more general case.

I suppose you meant d = 1 + 0. However, I went over the derivation again but I don't understand why is d and r in the log term and not outside of it?

 

[WilliamY]

Never mind. I think I figured it out. I reread the start of the paper carefully and it says,

"... the underlying asset return can be assumed to follow a lognormal random walk."

The SDE should be:

($dS=\sigma SdW+[\log(d)-\log(r)]Sdt$)

Thanks for your time Doug.