Binomial Option Pricing Model

Binomial Option Pricing Model

A simple model used to price options that reduces possibilities of price changes, removes the possibility for arbitrage, assumes a perfectly efficient market, and shortens the duration of the option.

Notes:

The binomial model takes a risk-neutral approach to valuation. It assumes that underlying security prices can only either increase or decrease with time until the option expires worthless.

See also: Black Scholes Model, Efficient Market Hypothesis, Expiration Date, Heath-Jarrow-Morton (HJM) Model, Option, Strike Price

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Binomial option pricing model

An option pricing model in which the underlying asset can assume one of only two possible, discrete values in the next time period for each value that it can take on in the preceding time period.