Option pricing--Binomial Model and Black Scholes

A quick look at the two main ways to price options

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    Binomial Option Pricing

    This is based on the idea that prices can go up or down.  From that simple start, and using the ability to lend and borrow, we can determine the price of the option on the security.  The Wikipedia page makes it sound difficult, but start easy (the Bionic Turtle Video is a great starting point!) 

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    Binomial (one step) for option price

    The binomial solves for the price of an option by creating a riskless portfolio.

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    CFA L2- Risk Neutral Probability- Binomial Option Pricing Model

    We offer the most comprehensive and easy to understand video lectures for CFA and FRM Programs. To know more about our video lecture series, visit us at www.fintreeindia.com This video was captured during a live session by Utkarsh Jain in one of the session of in CFA level II class in Pune.

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    Examples To Understand The Binomial Option Pricing Model | Investopedia

    "In an arbitrage-free world, if we have to create a portfolio comprising of these two assets (call option and underlying stock) such that irrespective of where the underlying price goes ($110 or $90), the net return on portfolio always remains the same. Suppose we buy ā€˜dā€™ shares of underlying and short one call option to create this portfolio." Read more: Examples To Understand The Binomial Option Pricing Model | Investopedia http://www.investopedia.com/articles/investing/021215/examples-understand-binomial-option-pricing-model.asp#ixzz46xCERvYp Follow us: Investopedia on Facebook

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    Binomial options pricing model

    In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. The binomial model was first proposed by Cox, Ross and Rubinstein in 1979. Essentially, the model uses a "discrete-time" ( lattice based) model of the varying price over time of the underlying financial instrument.

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    Black-Scholes model - Wikipedia, the free encyclopedia

    The Black-Scholes or Black-Scholes-Merton model is a mathematical model of a financial market containing derivative investment instruments. From the model, one can deduce the Black-Scholes formula, which gives a theoretical estimate of the price of European-style options.

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    Payoff to Call Options at Expiration (using a Milk Coupon as the example)

    A look at how much a call option is worth at expiration. Includes payoff diagrams. Introduction to financial derivatives

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    Introduction to the Black-Scholes formula

    Learn for free about math, art, computer programming, economics, physics, chemistry, biology, medicine, finance, history, and more. Khan Academy is a nonprofit with the mission of providing a free, world-class education for anyone, anywhere.

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    Black-Scholes Excel Formulas and How to Create a Simple Option Pricing Spreadsheet

    Below I will show you how to apply the Black-Scholes formulas in Excel and how to put them all together in a simple option pricing spreadsheet. There are 4 steps:

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    Option Calculators

    Below are some examples of option calculators...most sites will allow you to do either Black-Scholes or Binomial

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    Binomial

    MITI's Binomial Calculator is an easy tool that can calculate the fair value of an equity option based Binomial Models along with the Greek sensitivities.

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    Options Calculator

    Thanks to Drexel, you can also calculate all of the greeks :)

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    Put-call parity

    Learn for free about math, art, computer programming, economics, physics, chemistry, biology, medicine, finance, history, and more. Khan Academy is a nonprofit with the mission of providing a free, world-class education for anyone, anywhere.

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