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Derivatives and Risk Management, 1st Edition
book

Derivatives and Risk Management, 1st Edition

by Sundaram Janakiramanan
May 2024
Intermediate to advanced content levelIntermediate to advanced
542 pages
27h 26m
English
Pearson India
Content preview from Derivatives and Risk Management, 1st Edition
The Binomial Options Pricing Model 379
Probability of low price = Probability of price decrease during period 1
× Probability of price decrease during period 2
= (1 – p
2
) × (1 – p
1
)
= (1 – 0.4077) × (1 – 0.4077)
= 0.3508
Since the call option is in-the-money only at the high price, the call price is calculated with the probability
of 0.1662 in the two-period model, whereas it is calculated with the probability of 0.4082 in the single-
period model.
is is the major advantage of a binomial model, as the call price movement is based on what happens
to the stock price in the interim period before expiry. In a single-period model, we do not give im ...
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Publisher Resources

ISBN: 9781299447547Publisher Website