Binomial Pricing Model
Definition
A binomial pricing model is a method of valuing an option based on building a lattice of all the possible paths up and down that the underlying price might take from start until expiry, assuming that, at each price change, the price either rises by a given amount (or proportion), or falls by a given amount (or proportion).
How is it used?
One way of building a model for option pricing is to simplify the assumptions to the possibility that the price of something may move up by a certain amount or down by a certain amount in a particular time period. Suppose, for example, that the price of a particular asset is now 1 and that, each month, the price may rise by a multiplicative factor of 1.010000 or fall by a ...
Get Key Financial Market Concepts, 2nd Edition now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
