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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 economic components modelAbramsâ€™ model for calculating DLOM based on the interaction of discounts from four economic components. Gordon modelpresent value of a perpetuity with growth. log size modelAbramsâ€™ model to calculate discount rates as a function of the logarithm of the value of the firm. QMDM (quantitative marketability discount model)model for calculating DLOM for minority interests r the discount rate 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-style optionAn option contract that can be exercised at any time between the date of purchase and Arbitrage Pricing Theory (APT)An alternative model to the capital asset pricing model developed by Arbitrage-free option-pricing modelsYield curve option-pricing models. 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 Black-Scholes option-pricing modelA model for pricing call options based on arbitrage arguments that uses 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 Capital asset pricing model (CAPM)An economic theory that describes the relationship between risk and Compound optionoption on an option. Constant-growth modelAlso called the Gordon-Shapiro model, an application of the dividend discount 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 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. 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 European optionoption that may be exercised only at the expiration date. Related: american option. 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. 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. Greenshoe optionoption that allows the underwriter for a new issue to buy and resell additional shares. 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. 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 Lookback optionAn option that allows the buyer to choose as the option strike price any price of the Liquid yield option note (LYON)Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co. 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 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 OptionGives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a 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. Option-adjusted spread (OAS)1) The spread over an issuer's spot rate curve, developed as a measure of 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 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. Pricing efficiencyAlso called external efficiency, a market characteristic where prices at all times fully Put an optionTo exercise a put option. Put optionThis security gives investors the right to sell (or put) fixed number of shares at a fixed price within Quality optionAlso called the swap option, the seller's choice of deliverables in Treasury Bond and Treasury Regulatory pricing riskRisk that arises when regulators restrict the premium rates that insurance companies Single factor modelA model of security returns that acknowledges only one common factor. Single index modelA model of stock returns that decomposes influences on returns into a systematic factor, Simple linear trend modelAn extrapolative statistical model that asserts that earnings have a base level and Single-index modelRelated: market model Split-fee optionAn option on an option. The buyer generally executes the split fee with first an initial fee, Stochastic modelsLiability-matching models that assume that the liability payments and the asset cash flows Stock index optionAn option in which the underlying is a common stock index. Stock optionAn option in which the underlying is the common stock of a corporation. Tax deferral optionThe feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is Tax-timing optionThe option to sell an asset and claim a loss for tax purposes or not to sell the asset and Time value of an optionThe portion of an option's premium that is based on the amount of time remaining Timing optionFor a Treasury Bond or note futures contract, the seller's choice of when in the delivery month to deliver. Two-factor modelBlack's zero-beta version of the capital asset pricing model. UnderpricingIssue of securities below their market value. Value-at-Risk model (VAR)Procedure for estimating the probability of portfolio losses exceeding some Virtual currency optionA new option contract introduced by the PHLX in 1994 that is settled in US$ rather Wild card optionThe right of the seller of a Treasury Bond futures contract to give notice of intent to deliver Yield curve option-pricing modelsmodels that can incorporate different volatility assumptions along the Cost-plus pricingA method of pricing in which a mark-up is added to the total product/service cost. Target rate of return pricingA method of pricing that estimates the desired return on investment to be achieved from the
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