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Derivatives

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  • April 13, 2020
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Binomial Model

A discrete model for pricing options that was introduced by Cox, Ross and Rubinstein in 1979. In this model, the price of an underlying stock is structured to move in one of two possible new directions (one up and one down) at different nodes (points in time). This is done by constructing a binomial tree that represents a price process which increases or decreases by a given factor with its corresponding probability. The approximation method followed in this model is based on the central limit theorem.

This model is also known as a two-state model.


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