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$S_0$: The stock price today. $p$: The probability of a price rise. $u$:The factor by which the price rises. $d$: The factor by which the price falls. Three equations are required to be able to uniquely specify values for the three parameters of the binomial model. Two of these equations arise from the expectation that over a small period of time the ...


You know that the Ho-Lee model is represented by the stochastic differential equations \begin{align} dr_t=\lambda_t\,dt+\sigma\,dW_t \end{align} In order to Implementation our binomial tree, we use the Euler discretization. \begin{align} r_t=r_{t-\Delta t}+\lambda_{t-\Delta t}\,\Delta t+\sigma\,\sqrt {\Delta t} \,Z \end{align} where $Z$ is a standard normal ...

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