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Advanced Quantitative Finance with C++ by Alonso Peña Ph.D

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The Binomial Trees method

Binomial Trees (BT) can be traced to the work of (Cox, Ross, and Rubinstein 1979). Like MC methods, they are based on the idea of how the discretization of stock prices can jump up or down. Unlike the MC methods, BT are not based on simulation of many possible paths, but on the construction of a single path of possible future prices that bifurcates at every node. These prices, as well as their associated probabilities, constitute the tree. Once this tree is built, the prices of the underlying at maturity can be determined, and the the payoff at maturity can be then computed and discounted to the present time in order to determine the premium of the derivative.

Algorithm of the BT method

The BT method when applied to price ...

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