Binomial Option Pricing: Chap 1

Math
Finance
Published

February 1, 2025

Intro

Binomial Model

Fair Price

Arbitrage

Replicating a portfolio

Basic Concepts

Striking Price \(K\)

Call Option

Put Option

Forward Contract

Long, Short Position

Buy, Sell

Lend, Borrow

Variables and Parameters

  • \(t\)

  • \(X_n\): ?

  • \(\Delta_n\)

  • \(B_n\)

  • \(S_n\)

  • \(V_n\)

  • \(K\)

  • \(u\)

  • \(d\)

  • \(r\)

  • \((1+r)\)

  • \(\frac{1}{1+r}\)

  • \(p\)

  • \(\tilde{p}\)

  • \(q\)

  • \(\tilde{q}\)

Evolution

Backwards

No Arbitrage Assumption

\[ 0 < d < 1+r < u \]

Chap 2 # Convex Function # Jensen’s Inequality