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Discrete Time Option Pricing Theory

This document discusses discrete-time option pricing theory, including defining options and relevant pricing parameters. It also covers modeling stock price behavior using the lognormal distribution and discrete-time geometric Brownian motion. The document presents the binomial method for valuing European call options under the assumption of risk neutrality, providing examples of one-step calculations and a full example problem using the binomial method.

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Eric Emer
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47 views11 pages

Discrete Time Option Pricing Theory

This document discusses discrete-time option pricing theory, including defining options and relevant pricing parameters. It also covers modeling stock price behavior using the lognormal distribution and discrete-time geometric Brownian motion. The document presents the binomial method for valuing European call options under the assumption of risk neutrality, providing examples of one-step calculations and a full example problem using the binomial method.

Uploaded by

Eric Emer
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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DISCRETE-TIME OPTION PRICING THEORY

Eric Emer

Defining Options

Relevant Parameters for pricing derivative:

Modeling Stock Price Behavior (1)


The lognormal distribution.

Modeling Stock Price Behavior (2)


Discrete-Time Geometric Brownian Motion

Modeling Stock Behavior (3)


Binomial Method

Binomial Model, Valuing European Call Option

Risk Neutrality

Binomial Method Calculation

One-Step Example

One-Step Example (2)

Example Problem using Binomial Method

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