The Binomial Model

This lecture introduces the binomial model, a discrete-time model with two securities: a riskless asset and a risky asset. The model describes price changes as the risky asset goes up or down by certain factors at each period. It covers topics such as absence of arbitrage, direct proof, market completeness, recursive valuation, call and put options pricing, market convergence, and computational issues. The lecture also discusses the construction of the model, sample paths, volatility assumptions, convergence theorems, and examples of convergence to the Black-Scholes model. Practical examples and pseudo codes are provided to illustrate the model's application and pricing errors in different scenarios.