Quant Finance, Explained
Pricing without guessing: the binomial tree
16:03
Course episode four, Wilmott chapter three. Price a call that expires in one step on a stock that can only go to one of two prices. The temptation is to weight the outcomes by how likely you think they are. Instead we build the hedge by hand with round numbers: own half a share against the call so the portfolio is worth the same in both states, and the price falls out with no probability of up…