Binomial option pricing model
Price a European option with a binomial tree, step by step: from the payoff at expiry through the risk-neutral probability to the price today, compared against Black–Scholes.
Related topics
Terms that come up in this calculation
- VolatilityA measure of how sharply and how often the value of an investment swings. High volatility means a wild ride, not necessarily a worse result.
- RiskThe degree of uncertainty about how an investment will turn out. A higher possible return usually comes with higher risk, but that is a possibility, not a promise.
- Present value (PV)What a future sum of money is worth today. It answers the question "how much would I have to have now for it to grow into that".
- DiscountingConverting a future sum into its value today: the opposite of compounding. It shows how much you would need to have now to reach a given future amount in a given time.
Calculators that follow on from this one
- Compound interestWork out how an investment grows under compound interest, including regular contributions, the effect of inflation, and a year-by-year breakdown.
- DiscountingWork out the present value of future cash flows, with the discount factor, a year-by-year breakdown, the effect of inflation and the whole method explained.