Lecture 12

In Lecture 12, we studied two-period European call pricing in the binomial model. We derived the price both by direct risk-neutral expectation over terminal paths and by backward induction, and connected these methods to the martingale pricing framework. We also introduced the Cox–Ross–Rubinstein (CRR) tree, its up and down factors, and its risk-neutral probability.

Material used:

• Petters–Dong, Sec. 8.5.3, Two-Period Binomial Pricing, pp. 417–420; Sec. 5.2.2, The Risk-Neutral CRR Tree, pp. 230–236.
• Pliska, Sec. 3.5, The Binomial Model, pp. 100–105.
• Formula sheet for Lecture 12