BINOMIAL OPTION PRICING MODEL
Options valuation method that employs iterative procedure to allow specification of nodes or points in time, time span between valuation date and option’s maturity date. The model, developed by Cox, Ross, and Rubinstein in 1979, cuts down the probabilities of price changes, takes away arbitrage possibilities, shortens the option’s life span, and presumes a perfectly efficient market. Accounting these factors, the model can provide a mathematical valuation of the option at every time period indicated.
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