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115 CFA

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115.080.02.11 - Reading 49 - 11. Binomial Valuation of Options

# 11. Binomial Valuation of Options

## n. explain how the value of an option is determined using a one-period binomial model;

How is a binomial options valuation model different than other options valuation models?

The binomial model differs from other option pricing models in that it uses a "discrete-time" model of the varying price over time of financial instruments; the model is thus able to handle a variety of conditions for which other models cannot be applied.

What is the discrete-time framework for binomial pricing model?

The binomial pricing model uses a "discrete-time framework" to trace the evolution of the option's key underlying variable via a binomial lattice (tree), for a given number of time steps between valuation date and option expiration.

(Lots of examples worth revisiting on this page)

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- CFA