Binomial Trees and Security Pricing Modeling

  • Arlie O. Petters
  • Xiaoying Dong
Part of the Springer Undergraduate Texts in Mathematics and Technology book series (SUMAT)


We introduce a discrete-time model of a risky security’s future price using a binomial tree. By increasing the number of time-steps in the tree, the assumption is that one obtains a more and more accurate model of the random future price of a security. This chapter covers: the general binomial tree model of future security prices, the Cox-Ross-Rubinstein (CRR) tree in the real world and risk-neutral world, the Lindeberg Central Limit Theorem with applications to the continuous-time limit of the CRR tree, and statistical and probability formulas for continuous-time security prices.


Future Price Current Price Price Formula Security Price Standard Normal Random Variable 
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Copyright information

© Arlie O. Petters and Xiaoying Dong 2016

Authors and Affiliations

  • Arlie O. Petters
    • 1
  • Xiaoying Dong
    • 1
  1. 1.Department of MathematicsDuke UniversityDurhamUSA

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