Research Discussion #4

Research Discussion #4

define the binomial tree option pricing. Provide an example

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Make  sure that you check the learning goals for this week before you go on  to the next one. Your preparation of the computations for this research  question would benefit greatly from having such information. You may  search about the binomial tree option and how it is priced.

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With  binomial option price models, the assumptions are that there are two  possible outcomes—hence, the binomial part of the model. With a pricing  model, the two outcomes are a move up, or a move down.2 The  major advantage of a binomial option pricing model is that they’re  mathematically simple. Yet these models can become complex in a  multi-period model.

In  contrast to the Black Sholes Model, which provides a numerical result  based on inputs, the binomial model allows for the calculation of the  asset and the option for multiple periods along with the range of  possible results for each period

The basic method of calculating the binomial option model is to use the same probability each period for success and failure until the option expires. However, a trader can incorporate different probabilities for each period based on new information obtained as time passes.

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