Two step binomial – 9 min screencast

by David Harper, CFA, FRM, CIPM

FRM |

Here is a quick review of two-step binomial. Note there are two process steps:

1. Build out the tree of forward asset prices
2. Backward induction: starting with the option values at the final nodes (which are simply their intrinsic value), "induce" the option prices back to today. Each node is a probability-weighted, discounted value of the two nodes after it.

Screencast:

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