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Unformatted text preview: the binomial option formula.
The understanding of the binomial formula is usually much improved by actually
implementing it on a computer. To help those of you who are trying to do so,
we show an example of how a typical computer algorithm for a binomial price is
implemented.
First, a remark on the up and down movements. The standard way of ﬁnding
these from the volatility of the underlying asset, the time to maturity
and the number of periods in the binomial approximation, is as follows A sample implementation in C++ is given below.
The computer algorithm for a binomial above merits some comments. There
is only one vector of call prices, and one may think one needs two, one at time
and another at time
. (Try to write down the way you would solve it
before looking at the given algorithm.) But by using the fact that the branches
reconnect, it is possible to get away with the given algorithm, using one less array.
You may want to check how this works. It is also a useful way to make sure one
understands binomial option pricing. 142 Multiple Periods in the Binomial Option Pricing Model Fig...
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This document was uploaded on 02/15/2014 for the course BEM 103 at Caltech.
 Fall '08
 Lehmann,B

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