What is a binomic tree?

The screenplay with two possible results at each stage is a binomic tree essentially a tree diagram that begins with a node that leads to two other nodes that could lead to two other nodes, etc. In finance, the binomic tree can trace the movements of assets. The binomic tree is also ideal for calling and filling options, because investors either lose or win, so there are always two possible results. The price of assets can go up or down from the price in the original node. The investor can create a binomic tree that monitors probable movements of assets of assets at several time points. The binomic tree can also appreciate the call and give options using probable movements of the price of the underlying asset. The basic asset that could be shares, futures or commodities. The value of the possibility at any moment depends on the price of the underlying asset. Calls and put options have an exercise price and investor receives profits or suffer losses depending on whether the price of the underlying assetsand at an expiration date above or below the exercise price.

also known as a model of binomic capabilities, a binomic tree that evaluates calls and optics, uses a formula based on the Black-Scholes model to determine the value of the possibility at any point before the expiry date. The Black-Scholes model helps investors to find out whether the current price of the option is in real value, overvalued or underestimated. To calculate the value of the option, the investor must know the initial assets and the prices of options, the price of the option exercise, the time remaining time, up to the expiration, volatility, Rimír return and interest rates without SK.

The basic problem with the binomic tree is that it assumes that the price of the underlying asset can be only one value or the other value; In fact, it can be any value. The Black-Scholes also has the prerequisites, including the fact that the asset does not pay any dividends, the possibilities are the European options thatIt can only be performed at the expiry date, the investor does not pay any commissions, interest rates remain constant and volatility remains constant. These assumptions cause the binomic tree to be less relevant to real -life situations.