what is the price today of the 2-year call option assuming 1 binomial step course hero
by Laurel Pagac
Published 2 years ago
Updated 1 year ago
6 min read
What Is The Binomial Option Pricing Model?
Basics of The Binomial Option Pricing Model
With binomial option price models, the assumptions are that there are two possible outcomes—hence, the binomial part of the model. With a pricing model, the two outcomes are a move up, or a move down.2The major advantage of a binomial option pricing model is that they’re mathematically simple. Yet these models can become complex in a multi-period model. In contr…
The basic method of calculating the binomial option model is to use the same probability each period for success and failure until the option expires. However, a trader can incorporate different probabilities for each period based on new information obtained as time passes. A binomial tree is a useful tool when pricing American options and embedded options. Its simplicity is its advan…
Real-World Example of Binomial Option Pricing Model
A simplified example of a binomial treehas only one step. Assume there is a stock that is priced at $100 per share. In one month, the price of this stock will go up by $10 or go down by $10, creating this situation: 1. Stock price= $100 2. Stock price in one month (up state)= $110 3. Stock price in one month (down state)= $90 Next, assume there is ...