Valuing a Derivative Using a One-Period Binomial Model
Free CFA Level I lesson in Derivatives. 11 min read, ~1,696 words.
Risk-neutral probability π = (1 + r − d) / (u − d). This is NOT a real probability, it is a pricing weight. Derivative value today = π-weighted expected payoff, discounted at the risk-free rate r. The actual probability of an up move is irrelevant. Investor risk preferences cancel...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Key Takeaways
- Exam Shortcuts
Learning objectives
- one-period binomial model
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