Follow us on LinkedIn
The binomial options pricing model is an option pricing approach used to price American-style options. An American option is a financial contract that can be exercised at any time up to and including on the expiration date. This contrasts with a European option, which can only be exercised on the expiration date.
The binomial model assumes that:
- There is a known constant interest rate (r) over the life of the option
- Volatility is constant over the life of the option.
The binomial model consists of a recursive method in which the value of an option at time “t” is computed from the value of the option at time “t-1”. Note that the binomial method is path-independent.
The binomial model was implemented in the calculator below.
Please enter the following input parameters:
- Spot Price: price of the underlying asset
- Strike Price: strike of the option contract
- Risk-Free Rate: risk-free rate
- Volatility: volatility of the underlying asset
- Dividend Yield: continuous dividend yield of the underlying asset
- Time to expiration in years: time to maturity of the option contract
The calculator returns the following results:
- Price: fair value of the option contract
- Paths of the stock price
Check out other finance calculators on our website.
Let us know what calculator you want us to develop in the comment section below.
Have an answer to the questions below? Post it here or in the forum
Billionaire Elon Musk’s electric vehicle maker Tesla Inc. hasn’t yet formally registered its plans for investment in a factory near Monterrey, Mexico, where it intends to make a next-generation electric vehicle.
Pramod Mittal’s firm won a settlement tied to a Soviet-era steel plant that has sucked up more than $7 billion in Nigerian public investment without producing any metal.