VRM 14. Binomial Trees: LOs

a) Calculate the value of an American and a European call or put option using a one-step and two-step binomial model.

b) Describe how volatility is captured in the binomial model.

c) Describe how the value calculated using a binomial model converges as time periods are added.

d) Define and calculate delta of a stock option.

e) Explain how the binomial model can be altered to price options on stocks with dividends, stock indices, currencies, and futures.