Valuing a Derivative Using a One-Period Binomial Model
Free CFA Level I lesson in Derivatives. 12 min read, ~1,850 words.
π = (1 + r − d) / (u − d) is the risk-neutral probability, a pricing weight, NOT a real probability. Derivative value today equals the π-weighted expected payoff discounted at the risk-free rate r. The actual probability of an up move is irrelevant. Investor risk preferences cancel through...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Check Your Understanding
- Exam Shortcuts
Learning objectives
- one-period binomial model
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