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.


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.



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Related Terms

Black Scholes Model

Efficient Market Hypothesis

Expiration Date

Heath-Jarrow-Morton (HJM) Model

Option

Strike Price

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