Pricing Options Using Binomial Trees

Carl Chiarella, Xuezhong (Tony) He () and Christina Sklibosios Nikitopoulos
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Christina Sklibosios Nikitopoulos: University of Technology Sydney

Chapter Chapter 17 in Derivative Security Pricing, 2015, pp 371-387 from Springer

Abstract: Abstract This chapter presents the binomial tree approach to the option pricing problem. We first illustrate the basic ideas of option pricing by considering the one-period binomial tree model and then extend to a multi-period binomial tree model. We then show that, by taking limits in an appropriate way, the binomial expression for the option price converges to the Black–Scholes option price and pricing equation. Alternatively, the continuous time model can be discretised in a way that yields the same expressions as obtained by the binomial tree approach.

Keywords: Stock Price; Continuous Time; Option Price; Continuous Time Model; European Call Option (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:dymchp:978-3-662-45906-5_17

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DOI: 10.1007/978-3-662-45906-5_17

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