15.6 The Single-period Binomial Options Pricing Model
A single-period binomial options pricing model is useful in valuing non-dividend-paying European op-
tions, as this option can be exercised only on the exercise date and we are only interested in the possible
stock prices on the exercise date.
At time T – 1, the stock price is S
T–1
. At time T, the stock price could be either u S
T–1
or d S
T–1
, where
u > 1 and d < 1. is means that the price at T will either increase to u S
T–1
or decrease to d S
T–1
. is is
shown in Figure 15.1.
If there is a call option with an exercise price of S
X
and an expiry date of T
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