Binomial Trees
Publisher Summary
Binomial trees serve as an intuitive approach to explain the logic behind option pricing models and also as a versatile computational technique. The binomial model assumes that, over a short period of time Δt, a financial asset's price S either rises by a small amount or goes down a small amount. The probability of an uptick is p, while a downtick occurs with probability 1 - p. Probabilities here are generally risk-neutral ones. A model for price movements may either be additive (i.e., absolute movements) or multiplicative (i.e., relative movements). “Additive” and “multiplicative” here refer to units of the observed price; computationally, taking logarithms can change a multiplicative model. There ...
Get Numerical Methods and Optimization in Finance 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.
