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Multiperiod Binomial Model

In: An Introduction to Derivative Securities, Financial Markets, and Risk Management

Author

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  • ROBERT A. JARROW
  • ARKADEV CHATTERJEA

Abstract

The following sections are included:IntroductionToward a Multiperiod Binomial Option Pricing ModelThe Stock Price EvolutionBinomial Option Price DataThe Stock Price TreeA Two-Period Binomial ModelBackward InductionOption Pricing via Synthetic Construction (Method 1)Repeat, Repeat: Risk-Neutral Pricing (Method 2)One-Step Valuation: Prelude to the Multiperiod Model (Method 3)The Multiperiod Binomial Option Pricing ModelBinomial Coefficients and Pseudo-probabilitiesRecasting the Two-Period Example in the Multiperiod FrameworkThe n-Period Binomial Option Pricing ModelEXTENSION 18.1: Linking the Binomial Model to the Black-Scholes-Merton ModelExtending the Binomial ModelKnown DividendsValuing American OptionsSpreadsheet ApplicationsA Two-Period Binomial ExampleA Sixteen-Period ExampleSummaryCasesQuestions and Problems

Suggested Citation

  • Robert A. Jarrow & Arkadev Chatterjea, 2019. "Multiperiod Binomial Model," World Scientific Book Chapters,in: An Introduction to Derivative Securities, Financial Markets, and Risk Management, chapter 18, pages 392-421 World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9781944659561_0018
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    Keywords

    Derivatives; Financial Markets; Risk Management; Arbitrage; Financial Engineering; Forwards; Futures; Call Options; Put Options; European Options; American Options; Swaps; Currency Swaps; Interest Rate Swaps; Commodity Swaps; Equity Swaps; Credit Default Swaps; Commodity Derivatives; Equity Derivatives; Index Derivatives; Interest Rate Derivatives; Commodities; Margins and Daily Settlements; Binomial Model; Black-Scholes Model; Black-Scholes-Merton Model; Delta Hedging; Gamma Hedging; Heath-Jarrow-Morton Model; Libor Model; Forward Rate Agreements; Interest Rate Futures; Interest Rate Options; Market Manipulation; Regulation; Derivatives Exchanges;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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