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Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition, 2nd Edition by Sheldon Natenberg

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 19

Binomial Option Pricing

The Black-Scholes model is the most widely used of all theoretical option pricing models. Unfortunately, a full understanding of the model requires some familiarity with advanced mathematics. In the late 1970s, three professors, John Cox of the Massachusetts Institute of Technology, Stephen Ross of Yale University, and Mark Rubinstein of the University of California at Berkeley, were trying to develop a method of explaining basic option pricing theory to their students without using advanced mathematics. The method they proposed, binomial option pricing,1 is not only relatively easy to understand, but the binomial model (also known as the Cox-Ross-Rubinstein model) that resulted from this approach can be used to price ...

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