Binomial Process

Binomial Process

The division of a time period into several increments, during each of which one of two things may occur. During the next increment, one of two other things may happen. The binomial process is used in some decision making processes; it also provides the mathematical basis for the binomial model for pricing option contracts.
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The model assumes that the price of the underlying stock evolves according to a binomial process and that exercise decisions are made so as to maximize the expected utility of the option holder's terminal wealth.