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The Binomial, Multinomial Distributions, and Option Pricing Model

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Abstract

In this chapter, we show how to use binomial and mutinomial distributions to derive option pricing models. In addition, we show how the Black and Scholes option pricing model is a limited case of binomial and multinomial option pricing model. Finally, a lattice framework of option pricing model is discussed in some detail.

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Notes

  1. 1.

    Assume that the price movement of JNJ stock today is completely independent of its movement in the past.

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Author information

Authors and Affiliations

  1. Department of Finance and Economics, Rutgers Business School, Rutgers University, Piscataway, NJ, USA

    Cheng-Few Lee

  2. Department of Finance, National Chengchi University, Taipei, Taiwan

    Hong-Yi Chen

  3. Center for PBBEF Research, Morris Plains, NJ, USA

    John Lee

Authors
  1. Cheng-Few Lee
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  2. Hong-Yi Chen
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  3. John Lee
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Corresponding author

Correspondence to Cheng-Few Lee .

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Lee, CF., Chen, HY., Lee, J. (2019). The Binomial, Multinomial Distributions, and Option Pricing Model. In: Financial Econometrics, Mathematics and Statistics. Springer, New York, NY. https://doi.org/10.1007/978-1-4939-9429-8_12

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