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The Binomial Pricing Model in Finance: A Formalization in Isabelle

  • Mnacho Echenim
  • Nicolas Peltier
Conference paper
Part of the Lecture Notes in Computer Science book series (LNCS, volume 10395)

Abstract

The binomial pricing model is an option valuation method based on a discrete-time model of the evolution of an equity market. It allows one to determine the fair price of derivatives from the payoff they generate at their expiration date. A formalization of this model in the proof assistant Isabelle is provided. We formalize essential notions in finance such as the no-arbitrage principle and prove that, under the hypotheses of the model, the market is complete, meaning that any European derivative can be replicated by creating a portfolio that generates the same payoff regardless of the evolution of the market.

Notes

Acknowledgments

We thank Hervé Guiol for his valuable comments on this work.

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Copyright information

© Springer International Publishing AG 2017

Authors and Affiliations

  1. 1.Univ. Grenoble Alpes, CNRS, LIGGrenobleFrance

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