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Binomial Trees and Security Pricing Modeling

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

Abstract

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.

Keywords

Future Price Current Price Price Formula Security Price Standard Normal Random Variable 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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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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