Definition for : Binomial method

The binomial method derives the Value of an Option by assuming that in every next moment there are two possible different prices of an Underlying asset. Increasing the number of these moments to infinity will ultimately cover all possible prices. It is then possible to derive the price of an Option by creating a Replicating portfolio of the Underlying asset and the Risk-free asset.

(See Chapter 24 Hybrid securities of the Vernimmen)

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