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question 1: subpart1: please explain in detail: what is the difference between no arbitrage pricing model...

question 1:

subpart1:

please explain in detail: what is the difference between no arbitrage pricing model of option and binomial pricing model for option? if any?

subpart 2:

can you take an example (any previous question which you solved is also okay) and solve it for both of the models in excel with formulas?

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Answer #1

In derivates markets arbirtrage is the certainty of profiting from a price difference between a derivates and a portfolio of assets that replicates the derivates cash flows .Derivates are priced using the no arbirtrage principle . The price of the derivates is set at the same level as the value of the replicating portfolio ,so that no trader can make a risk-free profit by buying one and selling the other

Binomial option pricing model ia a risk-neural model used to value path dependent options such as American options The binomial option pricing model uses an iterative procedure allowing for the specification of points in time during the time span between the valuation date and the options experation date .

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