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Binomial option pricing model |
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Definition of Binomial option pricing modelBinomial option pricing modelAn option pricing model in which the underlying asset can take on only two
Related Terms:Two-state option pricing modelAn option pricing model in which the underlying asset can take on only two Abandonment optionThe option of terminating an investment earlier than originally planned. Administrative pricing rulesIRS rules used to allocate income on export sales to a foreign sales corporation. American optionAn option that may be exercised at any time up to and including the expiration date. American optionAn option that can be exercised any time until its American-style optionAn option contract that can be exercised at any time between the date of purchase and Arbitrage-free option-pricing modelsYield curve option-pricing models. Arbitrage Pricing Theory (APT)An alternative model to the capital asset pricing model developed by Asian optionoption based on the average price of the asset during the life of the option. Asset pricing modelA model for determining the required rate of return on an asset. Asset pricing modelA model, such as the Capital Asset pricing model (CAPM), that determines the required Bargain-purchase-price optionGives the lessee the option to purchase the asset at a price below fair market Barrier optionsContracts with trigger points that, when crossed, automatically generate buying or selling of Basket optionsPackages that involve the exchange of more than two currencies against a base currency at Binomial modelA method of pricing options or other equity derivatives in Black-Scholes modelThe first complete mathematical model for pricing Black-Scholes option-pricing modelA model for pricing call options based on arbitrage arguments that uses Building a binomial treeFor a binomial option model: plotting the two cafeteria plan a “menu” of fringe benefit options that includecash or nontaxable benefits Call an optionTo exercise a call option. Call optionAn option contract that gives its holder the right (but not the obligation) to purchase a specified Call OptionA contract that gives the holder the right to buy an asset for a call optionRight to buy an asset at a specified exercise price on or before the exercise date. Capital asset pricing model (CAPM)An economic theory that describes the relationship between risk and Capital Asset Pricing Model (CAPM)A model for estimating equilibrium rates of return and values of capital asset pricing model (CAPM)Theory of the relationship between risk and return which states that the expected risk Compound optionoption on an option. constant-growth dividend discount modelVersion of the dividend discount model in which dividends grow at a constant rate. Constant-growth modelAlso called the Gordon-Shapiro model, an application of the dividend discount Cost-plus pricingA method of pricing in which a mark-up is added to the total product/service cost. Covered or hedge option strategiesStrategies that involve a position in an option as well as a position in the Currency optionAn option to buy or sell a foreign currency. Dealer optionsOver-the-counter options, such as those offered by government and mortgage-backed Delivery optionsThe options available to the seller of an interest rate futures contract, including the quality Deterministic modelsLiability-matching models that assume that the liability payments and the asset cash Discounted dividend model (DDM)A formula to estimate the intrinsic value of a firm by figuring the dividend discount modelComputation of today’s stock price which states that share value equals the present value of all expected future dividends. Dividend discount model (DDM)A model for valuing the common stock of a company, based on the Dividend growth modelA model wherein dividends are assumed to be at a constant rate in perpetuity. Doubling optionA sinking fund provision that may allow repurchase of twice the required number of bonds Down-and-in optionBarrier option that comes into existence if asset price hits a barrier. Down-and-out optionBarrier option that expires if asset price hits a barrier. dual pricing arrangementa transfer pricing system that allows economic components modelAbrams’ model for calculating DLOM based on the interaction of discounts from four economic components. Elasticity of an optionPercentage change in the value of an option given a 1% change in the value of the Embedded optionAn option that is part of the structure of a bond that provides either the bondholder or Equity optionsSecurities that give the holder the right to buy or sell a specified number of shares of stock, at Escalating Price OptionA nonqualified stock option that uses a sliding scale for European optionoption that may be exercised only at the expiration date. Related: american option. European optionAn option that can be exercised only on its expiration date. European-style optionAn option contract that can only be exercised on the expiration date. Exercising the optionThe act buying or selling the underlying asset via the option contract. Exit OptionsA variety of options available to an investor to recover their invested capital and the return on their investment. Extrapolative statistical modelsmodels that apply a formula to historical data and project results for a Factor modelA way of decomposing the factors that influence a security's rate of return into common and Foreign currency optionAn option that conveys the right to buy or sell a specified amount of foreign Futures optionAn option on a futures contract. Related: options on physicals. Garmen-Kohlhagen option pricing modelA widely used model for pricing foreign currency options. Gordon modelpresent value of a perpetuity with growth. Greenshoe optionoption that allows the underwriter for a new issue to buy and resell additional shares. Heavenly Parachute Stock OptionA nonqualified stock option that allows a deceased option holder’s estate up to three years in which to exercise his or her Incentive Stock OptionAn option to purchase company stock that is not taxable Index and Option Market (IOM)A division of the CME established in 1982 for trading stock index Index modelA model of stock returns using a market index such as the S&P 500 to represent common or Index optionA call or put option based on a stock market index. Interest OptionOne of several investment accounts in which your premiums may be invested within your life insurance policy. Internet business modela model that involves Intrinsic value of an optionThe amount by which an option is in-the-money. An option which is not in-themoney Irrational call optionThe implied call imbedded in the MBS. Identified as irrational because the call is Liquid yield option note (LYON)Zero-coupon, callable, putable, convertible bond invented by Merrill Liquid yield option note (LYON)Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co. log size modelAbrams’ model to calculate discount rates as a function of the logarithm of the value of the firm. Lookback optionAn option that allows the buyer to choose as the option strike price any price of the Margin requirement (Options)The amount of cash an uncovered (naked) option writer is required to Market modelThis relationship is sometimes called the single-index model. The market model says that the Markowitz modelA model for selecting an optimum investment portfolio, ModelingThe process of creating a depiction of reality, such as a graph, picture, or mathematical Multi-option financing facilityA syndicated confirmed credit line with attached options. Naked option strategiesAn unhedged strategy making exclusive use of one of the following: Long call Nonqualified Stock OptionA stock option not given any favorable tax treatment OptionGives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a OptionSee call option and put option OptionA right to buy or sell specific securities or commodities at a stated OptionRight to buy or sell a specified property at a specified amount at some time in the future. Option-adjusted spread (OAS)1) The spread over an issuer's spot rate curve, developed as a measure of Option elasticityThe percentage increase in an option's value given a 1% change in the value of the Option not to deliverIn the mortgage pipeline, an additional hedge placed in tandem with the forward or Option premiumThe option price. Option priceAlso called the option premium, the price paid by the buyer of the options contract for the right Option sellerAlso called the option writer , the party who grants a right to trade a security at a given price in Option writeroption seller. Options contractA contract that, in exchange for the option price, gives the option buyer the right, but not Options contract multipleA constant, set at $100, which when multiplied by the cash index value gives the Options on physicalsInterest rate options written on fixed-income securities, as opposed to those written on Out-of-the-money optionA call option is out-of-the-money if the strike price is greater than the market price Path dependent optionAn option whose value depends on the sequence of prices of the underlying asset percentage of sales modelsPlanning model in which sales forecasts are the driving variables and most other variables are Pie model of capital structureA model of the debt/equity ratio of the firms, graphically depicted in slices of Postponement optionThe option of postponing a project without eliminating the possibility of undertaking it.
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