The possible values that an option may possibly take at various time periods shown in a graphical presentation is called Binomial tree. The option value is based on the underlying asset and the option value at any point of time is dependent on the chance of the rise or fall in the rates of the underlying.
How Does Binomial Tree Applied in Options Market?
Binomial trees are one of the very practical and accurate tools for pricing different options. However, the method is found to have basic flaw i.e. there is problem in the values that an underlying asset can take at a particular point of time. The realistic approach to valuation is not followed as an asset can have numerous different values within a specified range.
Tags: Binomial Tree, pricing tools
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