Binomial Option Pricing Model
Free SOA Exam FAM (Fundamentals of Actuarial Mathematics) lesson in Option Pricing Fundamentals. 10 min read, ~1,543 words.
Risk-neutral probability:, valid only when (no arbitrage). One-period price:; actual probabilities are irrelevant. Replicating portfolio:, with for calls and for puts. Multi-period: work backwards from terminal payoffs, with the same at every node. American options: at each node compare early exercise value to continuation value.
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Check Your Understanding
- Exam Shortcuts
Learning objectives
- 6b
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