# Questions tagged [binomial-tree]

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### Difference between closed form binomial option value and monte carlo simulation

I am trying to calculate the price of a European call option using both the the closed form expression and a monte carlo simulation. But the value's I get from both these methods are not the same: ...
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### Interest Rate Volatility for Binomial Trees

Does anybody know where I can get the data or calculate interest rate volatility for modelling callable and putable bonds in binomial trees. I have swap curves data. Does any sources like Bloomberg ...
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### Why does changing the step size in my Binomial Tree changes the final stock prices so much?

I am trying to price a convertible bond by using a binomial tree. For this, I wrote a binomial tree for the stock price. I noticed that changing the step size (timesteps), changes the final value of ...
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### Pricing any Payoff structure using Binomial Tree(Pricing DDTPS)

I just wanted to confirm if its theoretically possible to value any derivative with a payoff that can be replicated by a portfolio of options,underlying and bonds. I wanted to value DDTPS which is a ...
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### Equivalent martingale measure and derivative pricing [duplicate]

So I just recently saw in class that to price a derivative you use what is called an equivalent martingale measure which allows you to compute the price of the contract which then will be the expected ...
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### Are risk neutral probabilities (for the arbitrage theorem) the same no matter what betting strategy is chosen?

I am learning the basics of risk neutral probability and arbitrage theorem. The arbitrage thm states that given a series of bets $r_{1}, ..., r_{n}$ either there is arbitrage, or there exists a ...
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### Asset pricing using a two period binomial tree

Recall that in the binomial model the risk-neutral probability for the price going up is given by p = 1+r−d / u−d where u > 1 and d < 1 specify the possible price jumps in the risky asset and r ...
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### Noob Question - Monte Carlo vs BAPM European Option Pricing Discrepancy

It's winter break (happy new year!), and I'm trying implement a few options pricing models (bapm, tapm, monte carlo, Fast Fourier etc.) for practice. The issue: My BAPM CRR model converges to 8....
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### Optimize call option purchase

If it is predicted that the price of a stock will increase from P1 to between P2 and P3 in time T (assume the distribution of the price will be evenly distributed between the range of [P2, P3] at time ...
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### Find the value of put option using a two-period binomial model

I've been asked to find the price of a two-month European Put Option with strike price $£40$. The price at $S_0=£30$, this can move up to $£40$ or down to $£25$ ($1/3$ chance to go up, $2/3$ chance to ...
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### Option pricing when stock price follows binomial tree

Assume that the stock price is currently trading at $S_0$. It is known that the stock price follows a binomial tree, such that its price will be either $S_0e^{\theta_u}$ or $S_0e^{−\theta_d}$ over the ...
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### What is the number of nodes, which have to evaluated, in a binomial tree for an option on dividend-paying stock?

In John Hull's book "Options, futures and other derivatives" 10th Edition, Chapter 21, there are two examples, on how binomial trees on dividend-yield stock option look like. The first ...
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### Why Vasicek model on a tree is a bad choice for pricing American option on credit prepayment?

I have an American option on a credit prepayment, i.e. the holder of the option can prepay the remaining credit if the interest rate falls below the initial strike. The pricing of this option was done ...
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### Risk-Neutral Probability in a Binomial Tree

This question is probably very simple and I'm just missing the easy solution but I'm a bit confused so I thought I might as well try ask here. I've been given this question: When I tried to calculate ...
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### Initial value of an investment project in a binomial real option valuation model

How do you measure the initial value of a project in a binomial tree ROV? I'm not specifically working in the valuation scene, but sort of had an interest in how the models work logically. It's not ...
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### Binomial Option Pricing Model gives increasingly higher value for out-of-the-money options

I was developing the binomial option pricing model via Python, according to the explanation given on Wikipedia. After computing the errors against the pricing of real options, I find an interesting ...
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### Prove the Euro call option value has positive relationship with the risk-free rate under discrete time model (Binomial tree model)

Could anyone show me how to prove that the European call option value has a positive relationship with the risk-free rate in a two-step binomial model with strike price K and different risk neutral ...
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### Does CRR Model lose completeness if we add another instrument?

Consider the multiperiod binomial/CRR model with one risky asset $S^{1}$ and a numeraire $S^{0}$. By seeing that the equivalent martingale measure is uniquely determined, we obtain that the market is ...
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### Risk neutral probability for stock with continuous dividend

Setting: binomial tree with one step over time $\Delta t$. I'm trying to derive the risk neutral probability for a stock which pays a continuous dividend, say $\delta$. i.e. probability $p$ such that ...
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### How to price barrier options (binomial tree)

What is the easiest way to price single barrier options using binomial tree? I found This method. Is this method good or maybe should I use another one? Does this price converge to price from BS model?...
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### Replication (binomial tree)

Hey what is the replication strategy on the binomial tree when I have for example 10 step model and dividend is paid at step 3? I have a well-written price tree but I do not know what the replication ...
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### Binomial Model Strike Price Assumption

Let us have the standard single-period binomial pricing model, and denote the up and down states of the underlying by $S_u$,$S_d$ respectively. Let us say we have a call option on the underlying with ...
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### Futures vs Forward pricing with different interest rates using binomial model

I'm given the aforementioned parameters for a two-step binomial model where the underlying pays no dividend, $S_0=50$ and $T=2$. With this information I was able to calculate the risk-neutral ...
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