VRM 14. Binomial Trees

Learning Objectives

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

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

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

4) Define and calculate delta of a stock option.

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