Question

What is Binomial Tree Option Value method?

Answer 1

The Binomial Tree Option Value Method is an option valuation method developed in 1979. It uses an iterative procedure and the time span includes the time between valuation date and the option's expiration date. This model reduces the possibility of price changes and removes arbitrage possibility. Thus, the model uses the discrete time model of varying price over time of the underlying financial instrument. In this model, it is assumed that the market is perfectly efficient, risk neutral approach to valuation is used and it is assumed that the underlying security prices can only either increase or decrease with time until the option expires.