Fixed Income & Options Math · Pricing
Options Payoffs & Binomial Trees
Price an option by building a riskless hedge: the one-step binomial model, risk-neutral probabilities, the replicating portfolio and delta, then multi-step trees, early exercise for American options, and why it all converges to Black–Scholes.
Step 1 of 6 · Overview40 min read ·
Key idea
Prereqs: Options basics (Markets); Probability rules; Fixed income math. Next: Black–Scholes & the Greeks. Follows Hull ch. 13, Cox–Ross–Rubinstein (1979) and MIT 18.S096.Next: 1. One step, two outcomes