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Topic: Binomial options model


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  Binomial options model - Biocrawler
The model differs from other option pricing models, in that it uses a “discrete-time” model of the varying price over time of financial instruments; the model is thus able to handle a variety of conditions for which other models cannot be applied.
The Binomial Value is found for each node, starting at the penultimate time step, and working back to the first node of the tree, the valuation date, where the calculated result is the value of the option.
For an American option, since the option may either be held or exercised prior to expiry, the value at each node is: Max (Binomial Value, Exercise Value).
www.biocrawler.com /encyclopedia/Binomial_options_model   (852 words)

  
 Kids.Net.Au - Encyclopedia > Binomial options model
The Binomial options model provides a generalisable numerical method for the valuation of options[?].
The binomial model uses a "discrete-time framework" to trace the evolution of the option's key underlying variable via a binomial lattice (tree); the given evolution then forms the basis for the option valuation.
In general, the value of the option at any node in the lattice is determined - given the option style - using the risk neutrality[?] assumption for the price of the underlying at that node, and the value of the option at the two later nodes (or the exercise value at a final node).
www.kids.net.au /encyclopedia-wiki/bi/Binomial_options_model   (253 words)

  
  Binomial options model   (Site not responding. Last check: )
Option valuation is then via application of the risk neutrality assumption over the life of the option, as the price of the underlying instrument evolves.
Option valuation using this method is, as described, a three step process: :1) price tree generation :2) calculation of option value at each final node :3) progressive calculation of option value at each earlier node; the value at the first node is the value of the option.
The Binomial Value is found for each node, starting at the penultimate time step, and working back to the first node of the tree, the valuation date, where the calculated result is the value of the option.
wiki-shorts.freestat.pl /10-858-Binomial_options_model.html   (643 words)

  
 Options pricing models used in the Australian market - ASX
At expiry the option values for each possible stock price are known as they are equal to their intrinsic values.
Traders may calculate fair value on a option to get an indication of whether the current market price is higher or lower than fair value, as part of the process of making a judgement about the market value of the option.
For the regular option trader it is sufficient to know that the volatility a trader assigns to a stock reflects expectations of how the stock price will fluctuate over a given period of time.
www.asx.com.au /investor/options/getting_started/pricing_models.htm   (1046 words)

  
 Spartanburg SC | GoUpstate.com | Spartanburg Herald-Journal
Option valuation is then computed via application of the risk neutrality assumption over the life of the option, as the price of the underlying instrument evolves.
The Binomial options pricing model approach is widely used as it is able to handle a variety of conditions for which other models cannot easily be applied.
The binomial model assumes that movements in the price follow a binomial distribution; for many trials, this binomial distribution approaches the normal distribution assumed by Black-Scholes.
www.goupstate.com /apps/pbcs.dll/section?category=NEWS&template=wiki&text=Binomial_options_model   (1348 words)

  
 Option pricing models (Black-Scholes model & Binomial model) & Calculators
These models can be used to see the impact on option prices of non-lognormal price distributions (as measured by coefficents of skewness (symmetry) and kurtosis (fatness of distribution tails and height of peaks)), and to calculate and plot the volatility smile implied by these distributions.
Skilled options traders will not rely solely on implied volatility but will look behind the estimates to see whether or not they are higher or lower than you would expect from historical and current volatilities, and hence whether options are more expensive or cheaper than perhaps they should be.
The option prices at each step are used to derive the option prices at the next step of the tree using risk neutral valuation based on the probabilities of the stock prices moving up or down, the risk free rate and the time interval of each step.
www.hoadley.net /options/BS.htm   (3588 words)

  
 Options Strategy Evaluation Tool by Peter Hoadley
Option chains can also be imported from a simple comma delimited text file if you have access to data from providers not explicitly handled by the software.
As well as providing a simple way of selecting options, the option chain facility also lets you compare, for a given option, spread or combination, the impact on profit and loss of increasing or deceasing strikes for a given expiry date, moving to different expiry dates for a given set of strikes, or both.
On-line option chains are also used to produce a number of "sentiment indicators": put/call ratios (open interest and current volume), and "open interest configuration" charts, showing the open interest for puts and calls by strike.
www.hoadley.net /options/strategymodel.htm   (2849 words)

  
 Key Term
Black-Scholes Generalized Model is used in the Model to compute the fair value of option for public companies and the minimum value of options for non-public companies.
The expected option life is the estimated time period when the option would be exercised by the option holder.
Option-pricing theory generally holds that the optimal (or profit-maximizing) time to exercise an option is at the end of the option's term; therefore, if an option is exercised prior to the end of its term, that exercise is referred to as suboptimal.
www.option123.com /keyterms.htm   (1501 words)

  
 WEB Courses in: Options Markets and Financial Futures Markets
The binomial model is the key model for many different types of options - here we introduce the concept as well as the concept of option models that one earns the risk-free rate of return when a hedged position is risk-free.
The model is the cornerstone of option literature.
Options on futures are interesting contracts that allow traders to speculate or hedge on a wide range of financial instruments and commodities.
www.fiu.edu /~finweb/options.htm   (1061 words)

  
 QQQ Options Trading Signals expiration stock
On an options exchange, every 3rd Friday of the month is an expiration day — this means that a number of options series expire on this day.
At the end of the expiration date, all those call options whose strike prices are higher than the price of the underlying stock or index will be worthless.
The binomial model calculates a tree of stock prices for various given time intervals within the expiration period.
www.qqq-options-trading.com /articles/options_expiration.asp   (362 words)

  
 LOAN GUARANTEES
Option analysis may be an ideal solution to determine the value of a guarantee.
In this binomial model, it is assumed that there is an equal chance for a move up or a move down.
In a probability-based model in which the final values are weighted according to their likelihood of occurring, the "average" value obtained from this normal distribution will be lower than that obtained by averaging only the extreme values.
www.parlaw.com /pubs/Schostag_Forsberg.htm   (4476 words)

  
 Stock option -
An option contract stipulates that one party (the holder or buyer) has the right (but not the obligation) to exercise the contract (the option) on or before a future date (the exercise date or expiration) and the other party (the writer or seller) has the obligation to honor the terms of the contract.
This is perhaps the least-known input into any pricing model for options, therefore traders often look to the marketplace to see what the implied volatility of an option is -- meaning that given the price of an option and all the other inputs except volatility you can solve for that value.
Models of option pricing were very simple and incomplete until 1973 when Fischer Black and Myron Scholes published the Black-Scholes pricing model.
www.wikistock.com /wiki/Options   (2855 words)

  
 Binomial Options Model - Forex Trading, Currency Forecast, FX Trading Signal, Forex Training Course, Education, ...
The model differs from other option pricing models, in that it uses a “discrete-time” model of the varying price over time of financial instruments; the model is thus able to handle a variety of conditions for which other models cannot be applied.
Essentially, option valuation here is via application of the risk neutrality assumption over the life of the option, as the price of the underlying instrument evolves.
For an American option, since the option may either be held or exercised prior to expiry, the value at each node is: Max (Binomial Value, Exercise Value).
www.actionforex.com /financial_glossary/financial_glossary/binomial_options_model_20041204336   (856 words)

  
 Stock option - Wikipedia   (Site not responding. Last check: )
A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the option's pay-off (and therefore its value).
Thus it is a contract to buy (known as a "call option") or sell (known as a "put option") a certain number of shares of stock, at a predetermined or calculable (from a formula in the contract) price.
Options trading, without intent to ever exercise the option, can be used as a form of leverage.
en.wikilib.com /wiki/Stock_option   (721 words)

  
 Option Software: Black-Scholes/Binomial Model
The only software that allows individuals who are not experts in valuation to value employee stock option using lattice model with variable inputs over the term.
The easiest software to value stock options and prepare options disclosure on 10Q and 10K as required by FAS 123(R) and FAS 128.
In "Option123 v 6.0", these inputs may be entered differently at each node over the term in Binomial model.
www.option123.com /ourmodel.htm   (538 words)

  
 Option Pricing using the Binomial Tree Model in C# - The Code Project - C# Algorithms
Unlike the Black-Scholes model, the binomial tree model is not a closed form equation, but rather is a computationally intensive numerical method.
The binomial coefficient is a part of the formula used in calculating the value of an individual binomial node.
In this case, we are pricing a put option where the current price of the asset is 100, the strike is set at 95, the time to maturity is 0.5 years, annualized volatility is 30%, the risk free rate is 8%, and we are constructing a binomial tree of 5 discrete time steps.
www.codeproject.com /cs/algorithms/binomialtree.asp   (1119 words)

  
 American Options Pricing
This added flexibility over European options results in American options having a value of at least equal to that of an identical European option, although in many cases the values are very similar as the optimal exercise date is often the expiry date.
The binomial model begins by evolving an seet price over a lattice with the asset price moving either up or down at each node of the the lattice.
The binomial model is simple to implement but is slower and less accurate than 'closed-form' models such as Black Scholes.
www.derivativesone.com /kb/american_options.aspx   (193 words)

  
 Chapter 4. Binomial Option Pricing Model
The binomial model has proved over time to be the most flexible, intuitive and popular approach to option pricing.
Binomial trees can also be used to determine the sensitivity of option values to the underlying asset price (delta and gamma), to the time-to-expiration (theta), to volatility (vega), to the riskless return (rho), and to the payout return (lambda).
The standard binomial option pricing model for options on assets can easily be extended to options on futures and options on foreign currencies.
www.in-the-money.com /presentation/sld063.htm   (427 words)

  
 Binomial Market Article - scoop   (Site not responding. Last check: )
This article and its associated software are designed to give you some insight into the binomial model of stock price movements and the concept of volatility.
The binomial model is presented in every finance text that discusses the theory of option valuation.
Binomial cycles result from a particular process of price movements, and the binomial process is a reasonable description of some aspects of real markets.
www.manticsoft.com /binomial.htm   (403 words)

  
 Trading and Investment Tools by Peter Hoadley
Binomial tree graphical option calculator: Calculate option prices using either the Cox, Ross and Rubinstein binomial option pricing model, or the equal probabilities tree pricing model, and display the tree structure used in the calculation.
Barrier option calculator using trinomial lattice: Calculate barrier option prices, and hedge parameters, using a trinomial lattice, and display the tree structure used in the calculation.
American and European option pricing comparison, and dividend impact analysis Examine how dividends paid during the life of the option impact the price, and in particular the sensitivity of the option price to different ex-dividend dates.
www.hoadley.net /options/options.htm   (1214 words)

  
 Using Real Options Software to Value Complex Options by Jonathan Mun
The real options approach incorporates a learning model, such that management makes better and more informed strategic decisions when some levels of uncertainty are resolved through the passage of time.
Binomial lattices are also very flexible in that they can be tweaked easily to accommodate most types of real options problems.
The real options models included in the software are American options, European options, barrier options, contraction options, expansion options, stochastic timing options, switching options, two-asset correlation options, et cetera, all driven in an easy-to-use graphical user interface.
www.fenews.com /fen27/RealOptions.html   (2576 words)

  
 binomial option pricing model information -- binomial option pricing model   (Site not responding. Last check: )
Binomial option pricing model An option pricing model in which the underlying asset can assume on only two possible, discrete values in the next time period for each value that it can take on in the...
Binomial Option Pricing Model This is an option pricing model which uses the binomial tree to model the price of the FX spot rate.
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...
www.singoption.info /binomialoptionpricingmodel   (1156 words)

  
 Binomial Creep - CFO.com
The model assumes that options are exercised at the end of the option's contractual term and that expected volatility, dividends, and Treasury interest rates remain constant.
Just when those options are actually exercised is affected by demographic factors such as age, gender, pay level, and years of service to the company as well as variables such as share-price movement, expected stock volatility, expected holding period, vesting period, and company-specific exercise rules.
Six large brokerages, which together handle 85 percent of employee stock option trades, have agreed to share their exercise data with the SoA; the group is also eliciting comment and advice from the Big Four accounting firms regarding assumptions and model technology.
www.cfo.com /printable/article.cfm/6940478?f=options   (892 words)

  
 Real Options : : Overview : : FAQ
In contrast to the valuation of financial options --where decision-making it is a matter of shopping for the best deal on a specified contract -- the valuation of a real option requires that it be identified and specified.
One approach for handling complex real options, risk-neutral valuation, was introduced by John Cox and Stephen Ross in 1976 and later applied by these authors and Mark Rubinstein in a very useful manner in the binomial option valuation model.
A particularly simple, yet robust, implementation of the risk-neutral approach is the binomial option valuation model, in which the underlying asset moves up or down by a small amount in each short period.
www.real-options.com /overview_faq.htm   (4909 words)

  
 List of finance topics: Binomial options model
The binomial model uses a "discrete-time framework" to trace the evolution of the option's key underlying variable via a binomial lattice (tree) for a given number of time steps between t = 0 and option expiration.
Given the option style, the value of the option at any node in the lattice is determined using the risk neutrality assumption for the price of the underlying at that node, and the value of the option at the two later nodes (or the exercise value at a final node).
Similar assumptions underpin both the binomial model and the Black-Scholes model, and the binomial model thus provides a discrete time approximation to the continuous process underlying the Black-Scholes model.
investcompany.com /finance/binomial_options_model.php   (421 words)

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