
388 Derivatives and Risk Management
R E V I E W Q U E S T I O N S
1. What is the major advantage of binomial options pricing mod-
els as compared to the Black–Scholes Model?
2. What are the assumptions about share price movement in
binomial options pricing?
3. Explain the principle of no-arbitrage in binomial options
pricing.
4. How can a call option be replicated by using the underlying
asset and a risk-free asset?
5. ere are two hedge ratios used in binomial options pricing.
Explain these ratios.
6. Binomial options pricing model uses risk-neutral probabili-
ties in valuing options. What is meant by risk-neutral ...