One of the most powerful features of the binomial approach to option pricing is the ability to value complex options
One complex option is known as a digital option.
The digital option pays a certain dollar amount only if the stock price is above or below a specified strike price.
The dollar cash flow from owning this type of option is known as the digital payout.
One Step Binomial
This is an extension of the one-step binomial process
A binomial model can be described by providing 3 parameters
p - the probability of the an up move
u - the price multiplier for an up move
d - the price multiplier for a down move
There is only a single path to each of the extreme nodes and a large number of different paths to the two central nodes.
Nodes in the middle are more probable than the extremes
This clustering of paths produces a normal distribution.
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