Explain the basic operation of the Binomial, Trinomial and
Replica Method in investing
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Explain the basic operation of the Binomial, Trinomial andReplica Method in investing
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Answer Binomial method The binomial option pricing model is an options valuation method developed in 1979 The binomial option pricing model uses an iterative procedure allowing for the specification of nodes or points in time pduring the time span between the valuation date and the options expiration date The model reduces possibilities of price changes and removes the possibility for arbitrage A simplified example of a binomial tree has only one time step Assume there is a stock that is priced at 100 per share In one month the price of this stock will go up by 10 or go down by 10 creating this situation Stock Price 100 Stock Price up state 110 Stock Price down state 90 Next assume there is a call option available on this stock that expires in one
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