Lecture 11

In Lecture 11, we introduced the multiperiod binomial model, in which the stock price moves up or down at each step. We considered the full path tree and derived the risk-neutral up-probability from the martingale condition. We also discussed the no-arbitrage restriction and how the model leads to backward pricing of claims.

Material used:

• Pliska, Sec. 3.5, The Binomial Model, pp. 100–105.
• Formula sheet for Lecture 11