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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. Essentially, the model uses a "discrete-time" (lattice based) model of the varying price over time of the underlying financial instrument, addressing cases where the closed-form Black–Scholes formula is wanting.

The binomial model was first proposed by William Sharpe in the 1978 edition of Investments (ISBN 013504605X),[1] and formalized by Cox, Ross and Rubinstein in 1979[2] and by Rendleman and Bartter in that same year.[3]

For binomial trees as applied to fixed income and interest rate derivatives see Lattice model (finance) § Interest rate derivatives.

  1. ^ William F. Sharpe, Biographical, nobelprize.org
  2. ^ Cox, J. C.; Ross, S. A.; Rubinstein, M. (1979). "Option pricing: A simplified approach". Journal of Financial Economics. 7 (3): 229. CiteSeerX 10.1.1.379.7582. doi:10.1016/0304-405X(79)90015-1.
  3. ^ Richard J. Rendleman, Jr. and Brit J. Bartter. 1979. "Two-State Option Pricing". Journal of Finance 24: 1093-1110. doi:10.2307/2327237

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