In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. In reality the company hardly changes its valuation on a day-to-day basis, but the stock price and its valuation change every second. This shows the difficultly in reaching a consensus about present day price for any tradable asset, which leads to arbitrage opportunities. In the financial world, the Black-Scholes and the binomial option models of valuation are two of the most important concepts in modern financial theory.
InThis tutorial introduces binomial option pricing, and offers an Excel spreadsheet to mosel you better understand the principles. That is to say, the owner of the portfolioowns h shares of the stock and then sells (writes) one call withan expiration date of one period.
66 binomial options put model pricing