# Tag Info

### What's the logic behind binomial model ups and downs?

one of the most fundamental results states that the binomial model converges towards the Black Scholes model if the step size $\Delta t$ converges to zero. The Black Scholes model is an option ...
• 1,466

### Why risk neutral probabilities should be strictly greater than zero for no arbitrage condition?

There is one condition under which the risk neutral probability of an event can be zero: if the real world probability is zero. If not then any contract that pays off in that event must go down in ...

### Failing to replicate Wilmott's results for binomial option pricing

I have checked the answer to my side, even using the alternative, the original formula $u=e^{\sigma \sqrt{\delta t}}$, I still get $1.05943$ I suspect it is not really a logic error, but more of a ...
• 341
Accepted

### Intuition behind short 1/2 stock in option value - Paul Wilmott Quant Finance Chapter 3.3

This is a classic interview question, btw. Probabilities you mention are "subjective" hence are irrelevant for option pricing. You need to use risk neutral stock migration probabilities, ...
• 559
1 vote
Accepted

### $\mathbb{Q}$ measure and $\mathbb{P}$ measure, trading strategy

As people pointed out, P and Q are different because of risk aversion. Under the P measure, the payoff in bad states are worth more; whereas Q measure is risk neutral. This is similar to why people ...
• 51
1 vote

### Maximal increase payoff

This is the sum of look back call and lookback put with floating strike. You can then price it using the formulas in wikipedia: https://en.wikipedia.org/wiki/Lookback_option
1 vote

1 vote

### Real Options: Calculating the "option to switch use" using binomial lattices

hmm, Trigeorgis seems to be saying that the value of being able to switch at one of the times 1,2 and 3 is the same as the sum of being able to switch at each of the times. This seems wrong to me ...
• 6,993
1 vote

### Calculate volatility under the binomial model for option pricing

Black Scholes can be seen as the continuous limit of a binomial model when the number of steps go to infinity. (It can be seen as a result of Donsker's theorem) Thus it is normal that your call ...
• 2,442
1 vote

### Proof of optimal exercise time theorem for American derivative security in N-period binomial asset-pricing model

I think the proof has already been provided at the end of the proof in Shreve's Theorem 4.4.5. Specifically, note that, since \begin{align*} \frac{1}{(1+r)^{n \wedge \tau^*}}V_{n \wedge \tau^*}. \end{...
• 21.2k

Only top scored, non community-wiki answers of a minimum length are eligible