Binomial Option Pricing Model

Binomial option pricing is a simple but powerful technique that can be used to solve many complex option-pricing problems. In contrast to the Black-Scholes and other complex option-pricing models that require solutions to stochastic differential equations, the binomial option-pricing model (two state option-pricing model) is mathematically simple. It is based on the assumption of no arbitrage.1

So in essence, the binomial option pricing model assumes a perfectly efficient market. Under this assumption, it is able to provide a mathematical valuation of an option at each point in the timeframe specified. The binomial model takes a risk-neutral approach to valuation and assumes that underlying security prices can only either increase or decrease with time until the option expires worthless.2




References»

1BINOMIAL OPTION PRICING
2Breaking Down Binomial Option Princing Model


External References»


CIO Desk Reference»

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Modified on 2016/11/15 15:01 by Sourabh Hajela  
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