What are the applications of binomial trees?
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2$\begingroup$ The question seems to be overly broad. Have you looked at the corresponding Wikipedia article (and the links provided therein)? en.wikipedia.org/wiki/Binomial_options_pricing_model $\endgroup$– olakerCommented Mar 24, 2011 at 11:17
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$\begingroup$ question is too broad and too basic - voting to close $\endgroup$– vonjdCommented Mar 24, 2011 at 11:56
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$\begingroup$ This is a bit too broad. We are really pushing for focused questions that are deeper than wikipedia. Please check out Wikipedia and Hull's book on options, futures, and other derivatives, and let us know what if that motivates any more questions. $\endgroup$– Richard HerronCommented Mar 24, 2011 at 13:21
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2 Answers
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From wiki's entry
In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. The binomial model was first proposed by Cox, Ross and Rubinstein (1979). Essentially, the model uses a "discrete-time" (lattice based) model of the varying price over time of the underlying financial instrument. In general, binomial options pricing models do not have closed-form solutions.
See the full post, http://en.wikipedia.org/wiki/Binomial_options_pricing_model, for methodology/implementation guidelines.
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3$\begingroup$ I think it is not very helpful to cite wikipedia - but it is not your fault but the question is too broad and too basic $\endgroup$– vonjdCommented Mar 24, 2011 at 11:55
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You can also read about Cox-Ross-Rubinstein model (see e.g. Shreve, Stochastic Calculus for Finance I). Binomial trees are discrete-time models assuming that at each step there are only two possibilities for the change of the price.
