Binomial Option Pricing Selected Topics推荐.pdfVIP

11 Binomial Option Pricing: Selected Topics hapter 10 introduced binomial option pricing, focusing on how the model can be used to compute European and American option prices for a variety of underlying assets. In C this chapter we continue the discussion of binomial pricing, discussing selected topics and delving more deeply into the economics of the model and its underlying assumptions. First, the binomial model can value options that may be early-exercised. We examine early exercise in more detail, and see that the option pricing calculation reflects the economic determinants of early exercise discussed in Chapter 9. Second, the binomial option pricing formula can be interpreted as the expected option payoff one period hence, discounted at the risk-free rate. In Chapter 10 we referred to this calculation as risk-neutral pricing. This calculation appears to be inconsistent with standard discounted cash flow valuation, in which expected cash flows are discounted at a risk- adjusted rate, not the risk-free rate. We show that, in fact, the binomial pricing formula (and, hence, risk-neutral valuation) is consistent with option valuation using standard discounted cash flow techniques. Third, we discuss the implicit distributional assumptions in the binomial model, namely that continuously compounded returns are normally distributed in the limit, which implies that prices are lognormally distributed. Finally, we saw how to price options on stock indices where the dividend is continu- ous. In this chapter we adapt the binomial model to price options on stocks that pay