On Cox-Ross-Rubinstein Pricing Formula for Pricing Compound Option

Abstract

The fundamental objective of this paper is twofold. Firstly, to derive the Cox-Ross-Rubinstein type new formula for risk neutral pricing of European compound call option, where the underlying asset is also a European call option. Thirdly, to prove that our newly derived CRR risk neutral pricing formula for compound call option, converges in distribution to the well known, continuous time Black-Scholes formula for pricing the compound call option on call.