Binomial options model

The Binomial options model provides a generalisable numerical method for the valuation of options[?]. It was first proposed by Cox, Ross and Rubinstein (1979).

The binomial model uses a "discrete-time framework" to trace the evolution of the option's key underlying variable via a binomial lattice (tree); the given evolution then forms the basis for the option valuation. In general, the value of the option at any node in the lattice is determined - given the option style - using the risk neutrality[?] assumption for the price of the underlying at that node, and the value of the option at the two later nodes (or the exercise value at a final node). The procees is iterative, starting at each final node, and then working backwards through the tree to t = 0, where the calculated value is the value of the option in question.

See also

• Black-Scholes: binomial lattices are able to handle a variety of conditions for which Black-Scholes cannot be applied.
• Financial mathematics, which has a list of related articles.

External links and References

• Cox JC, Ross SA and Rubinstein M. 1979. Options pricing: a simplified approach, Journal of Financial Economics, 7:229-263.
• The Binomial Model for Pricing Options, Thayer Watkins: http://www.sjsu.edu/faculty/watkins/binomial.htm
• Using Binomial Model to Price Derivatives, Quantnotes: http://www.quantnotes.com/fundamentals/options/binomial.htm
• American Options and Lattice Model Pricing, Quantnotes: http://www.quantnotes.com/fundamentals/options/americanoptions.htm
• Options pricing using a binomial lattice, Investment Basics: XXXVIII., The Investment Analysts Society of South Africa: http://www.moneymax.co.za/articles/displayarticlewide.asp?ArticleID=272347
• OS Financial Trading System's optiontutor: http://secure.webstation.net/~ftsweb/texts/optiontutor/eappch2.htm