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This document discusses call option binomial trees and risk-neutral valuation. It contains the following key points:
1. A binomial tree is used to model the possible movements in an underlying stock price over time to price a call option on the stock.
2. A riskless portfolio can be constructed that is long in the stock and short the call option. Setting this portfolio to have zero value gives the option price.
3. Risk-neutral valuation says the expected return on the stock should be the risk-free rate when pricing derivatives. This allows valuing options using probabilities that differ from the true probabilities.
Originalbeschreibung:
Subject: Financial Derivatives and Risk Management.
Book: "Options Futures and Other Derivatives" by HULL.
This document discusses call option binomial trees and risk-neutral valuation. It contains the following key points:
1. A binomial tree is used to model the possible movements in an underly…