FNCE30007 Lecture 4: Binomial Model 1
27 Jun 2018
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WEEkF0URswMMARY tAMDE
OnePeriodBinomialModel KeyPoints
Namefrom binomial armmeditock One
PeriodBinomialModel
funnierevolution liento outcomes Assumptions
Arbitragofreetrees
Qfffffmittnswallikebidoukrfmead Approach Hedging
lymeralPayoff Table
qq.euaneF.ateeampetitwewmarkets zep.mauaenforma aa4xo
NOARBITRAGE Approach 2Stateprices
No
interestrateuncertainty Formulae
forOu 0No
Binomialprocess Approaches Rick Neutral
probabilities
Thetree mint bearbitraaffneett Whyurettein
preventcollapreauetologicalinconsistency Formulae
for turtles
this isprettyeasy Man arbitrage
possiblestate nobodywould want aneoftheamtswhichcan'tbetrue
alsoensuresproperlydefined Mik neutral
probabilities
Approachildedging
lyneralPayofftat tT
to
hangnails
Xo TX the
Buyrhares mso tms msu
Bowowtb bR
Homsotb Xbtms butter Xutmsu blur
Formulate
me Su Sp
bmtmsyI
cbMaso
Hintsonmat
Ifyou are buying shares lmao youwill borrow boo to
fundthefurehare
Ifyouare sellingshares moo you will savellendlbso thatmoneyinthe tank
Approachahtatepmies ofaderivativein aparticularitateoftheworld
Ou sos
u.it jOrg fOujXo
Xu0utXb0rsAfrfroach3
RirkNeutralprobabitities
trefrnenntslikelihoodoffnicemovementinafarticulardirectian
The Hr On jXp Itv DXo uTYIrXr
Whymethere
hatermemight want states
Thinkingimprobabilitieshelpsuscalculate
averages
reallyeasily
