This model assumes that the price of the underlying asset can be approximated by a binomial process
. At each time interval, the price of the underlying asset moves up to (u) or down (d).
Following the binomial process
, the stock can take three possible values after two periods 2[DELTA]t : [u.sup.2] [S.sub.0], ud[S.sub.0], [d.sup.2][S.sub.0]; at the end of three periods 3[DELTA]t, the stock has four possible values: [u.sup.3][S.sub.0], [u.sup.2]d[S.sub.0], [ud.sup.2][S.sub.0], [d.sup.3][S.sub.0].
Subrahmanyam, 1984, "The Valuation of Options When Asset Returns Are Generated by a Binomial Process
", Journal of Finance, 39:1525-1539
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.
The negative binomial process
, on the other hand, seems appropriate for state or national assessment that involves more than one test grader.
Allows for the analysis of Multiple binomial process
. specific situations.
Ramaswamy, "Simple binomial processes
as diffusion approximations in financial models," Review of Financial Studies, vol.
"Simple Binomial Processes
as Diffusion Approximation in Financial Models." Review: of Financial Studies 3 (3):393-430.