CFA Level I Derivatives - Binomial Model for Pricing Options

This is an excerpt from our comprehensive animation library for CFA Level I candidates. For more materials to help you ace the CFA Level I Exam, head on down to prepnuggets.com.

[@BurbenogExpert]

This pressntation was 30 times better then the one i had for 1month in lecture at university

[@sillyfarmerbilly8872]

Thank you so much for this very clear explanation of where they are getting the inputs for the binomial options pricing model. I was reading about this model in a book and it seemed to me like there was no way they were going to be able to have certainty about u and d, and the probabilities for each. Now I see that I was correct, this model is a beautiful brick house built on a foundation of birthday wishes and fairy tales. Thanks again, to you have been most helpful!

[@HICHAM-FINANCIER]

It's simple, clear and well explained ! Thank you for your video

[@PrepNuggets]

Glad it was helpful!

[@trading0074]

You are simply superb and amazing..... Thank you so much for your short and sweet explanation in a detailed yet simple and short manner...... Thank you, Thank you, Thank you, Thank you.... Love from INDIA❤️❤️❤️

[@TheOsnofa10]

Many thanks for this as it tremendously aided in recognizing the binomial model, unbeliveable resource!

[@PrepNuggets]

Glad it was helpful!

[@imankitt_]

Thankyou man! really a great video. helped a lot.

[@Tweetogreggieb59]

Two thumbs up, excellent presentation, great content, verifiable by those in the know, video recommended. Peace love and soul.

[@brendonwalker883]

Simple and clear representation. Thanks!

[@susan88888888able]

best explanation that I've seen. Cuts through so much BS

[@christiechen193]

omg, thank you so much for your clear explanation. My professor just does not know how to teach.

[@sahyjuf1603]

So clear explanation, thank youuuu

[@alvinbahati9143]

Very simple and clear stuff. Thumbs up!

[@rahulchachra3742]

The analyst in your example has estimated the Probability of an upmove of 25% as 0.6 , but how does that make the probability of downmove of 20% as 0.4 As in case where P is the probablity of happening of an event 1-P is the probability of not happening of the specified event what I dont understand is How does 1-P become probability of another unrelated event.

[@noraberzina4563]

The assumption of the binomial model is that either the price will go up or down (one of these two, no alternative things can happen), so if one happens with probability p, the pother happens with probability (1-p).

[@sillyfarmerbilly8872]

The model assumes only two possible prices at the end of the period, the up price and the down price. If this confused you because reality has nothing to do with such a thing, then you have found the problem with the model.

[@valenciabaptista4762]

Thank you, please cover Black Scholes Model

[@financelife7211]

Thanks so much!very simple,very clear,very helpful

[@nihalkenawy6547]

Excellent 👍👌 Where's the Quantitive videos? Plz

[@florianibk]

Why does D have to be the reciprocal of U, i.e. why does D equal 1/U? If you assume that the stock price can either go up or down by 25% you get different results!! (62,5 in case of up move, but only 37,5 instead of 40 in case of a down move!)

[@antonioromero878]

Juat shut up and do it the CFA way for exam purposes. Argue it after

[@investwithvincent6329]

@4:25 why is it important that we convert the up move to the payoff? Like... if we had just kept the up move and down move values as is and multiplied those figures by their respective probabilities, what effect does that have on our results?

[@armycreate4548]

Amazing explanation thanks a lot ❤️

[@williamebenezernewtist368]

Hi PrepNuggets, Why the down factor, D has to be reciprocal of U ?

[@williamebenezernewtist368]

@@vishaldwivedi3284 nope

[@effexxmusic2814]

Awesome video

[@kuan926]

I get how you calculated the expected price in the case of an up move, but how about in the case of an up dog?

[@typicalgamer5560]

whats up dog?

[@collecting_data]

01:40 How to estimate size

[@johnquintanilla4538]

depends on volatility

[@kenandikhailham8912]

How you assumed 7% Risk Free Rate? please help to my final project in college

[@Mikey-gw1fc]

RAD

[@eggtimer2]

So bad