Jarrow-Rudd formula

[nilakantan n s]

I am trying to implement the Jarrow-Rudd formula for valuing options with adjustment terms for skewness and kurtosis.

The Jarrow-Rudd formula in its simplest variation, gives the value of the option C (F) as

C (F) = C (A) +λ1Q3 +λ2Q4, where Q3 and Q4 involve some term of derivative of St at strike price K.

I am not clear how to work out this derivative in actual conditions. Their paper on approximate valuation of option pricing does not give any indication of this and I do not have access to their other paper on testing of the formula with market prices ( this paper is part of the book on option pricing edited by M Brenner.

Does anyone have an idea as to how to decode this term of derivative?

Thanks for your assistance in advance.

Nilakantan

 

[Keith Tan]

JR is just a form of CRR. isn't JR used in lattice pricing? Looks like a taylor expansion. Reading up on these 3 may yield the answer.

 

[nilakantan n s]

Thanks, Keith. I will look up the CRR methodology, as suggested.