Binomial Option Pricing Model
Free CFA Level II lesson in Derivatives. 20 min read, ~2,925 words.
Risk-neutral probability p = (1 + r - d) / (u - d). No-arbitrage forces this formula; it is NOT a forecast of where the stock is heading. Option value = [p x payoff_up + (1 - p) x payoff_down] / (1 + r). The discount factor is non-negotiable. American...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Key Takeaways
- Exam Shortcuts
Learning objectives
- forward commitments
- contingent claims
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