IDEAS home Printed from https://ideas.repec.org/h/pal/palchp/978-1-137-39116-2_4.html
   My bibliography  Save this book chapter

Binomial Trees, Risk-Neutral Pricing, and American Style Options

In: A Pragmatic Guide to Real Options

Author

Listed:
  • Tom Arnold

Abstract

In the third chapter, binomial trees were introduced to price European style options in which the mean of the value of the moption at maturity was computed and then discounted to produce the price of the option (i.e., the option premium). Inputs for building the tree, U, D, P(U), and P(D), and the discount rate were provided for the exercise. In this chapter, the calculation of these pieces of the model will be revealed based on a model by Cox, Ross, and Rubinstein (1979). Further, risk-neutral pricing used within the binomial tree will be demonstrated to be a mathematical convenience and not a necessary condition for pricing options (i.e., there is no need for an assumption that all investors are risk neutral). Finally, the process for pricing an American style option with the binomial tree will be explained, which will allow for the pricing of real options in the next chapter.

Suggested Citation

  • Tom Arnold, 2014. "Binomial Trees, Risk-Neutral Pricing, and American Style Options," Palgrave Macmillan Books, in: A Pragmatic Guide to Real Options, chapter 0, pages 53-83, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-39116-2_4
    DOI: 10.1057/9781137391162_4
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:palchp:978-1-137-39116-2_4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.