Single-Period Binomial Model

Abstract

The following sections are included:IntroductionApplications and Uses of the Binomial ModelA Brief History of Options Pricing ModelsOption Pricing Pre-1973Options Pricing, 1973 and AfterAn ExampleThe AssumptionsThe Single-Period ModelThe No-Arbitrage PrincipleBuilding Binomial TreesArbitrage-Free TreesStock Prices and MartingalesThe Pricing ModelThe Hedge RatioRisk-Neutral ValuationActual versus Pseudo-probabilitiesSummaryAppendixProving the No-Arbitrage ArgumentThe Probabilities and Risk PremiumCasesQuestions and Problems