14 Days of CFA: Binomial Option Pricing and the Risk-Neutral Probability

MarkMeldrum.com CFA instructor @RichieOhCerifi is here with Day 6 of our 14 days of CFA exam prep. The aim here is to demonstrate the use of risk-neutral probabilities in the binomial option pricing model. Eight and a half minutes to show that we don't need the probability of up and down movements to value an option in the binomial model, we do it using the hedge ratio. The risk neutral probabilities (which are not based on historical data) come along at the end as a quick way to reach the correct value without going via the hedge ratio.

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Texas Instruments BA II+ Calculator
https://www.youtube.com/playlist?list=PLCBifSfCnx3sjobyTnEyv2N4baxF8-wiS

Risk Foundations (FRM Topic 1)
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Quantitative Analysis (FRM Topic 2)
https://www.youtube.com/playlist?list=PLCBifSfCnx3sormazeHQr5G9etDITYStF

Financial Markets and Products: Intro to Derivatives (FRM Topic 3, Hull Ch 1-7)
https://www.youtube.com/playlist?list=PLCBifSfCnx3tQuvaS-lG-8ZqUh7NvxRDg

Financial Markets and Products: Option Trading Strategies (FRM Topic 3, Hull Ch 10-12)
https://www.youtube.com/playlist?list=PLCBifSfCnx3s7iycLx2eZQeIUPo_4a8n8

FM&P: Intro to Derivatives: Exotic options (FRM Topic 3)
https://www.youtube.com/playlist?list=PLCBifSfCnx3sfoUGYayuqJRhHA5jCFkGr

Valuation and Risk Models (FRM Topic 4)
https://www.youtube.com/playlist?list=PLCBifSfCnx3sqbQnW4HkZ3HoScTG0Lluz

For videos in our Chartered Financial Analyst (CFA) series, visit these playlists:

Chartered Financial Analyst (CFA) Level 1 Volume 1
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