# Binomial Tree

Binomial Tree
A graphical representation of possible intrinsic values that an option may take at different nodes or time periods. The value of the option depends on the underlying stock or bond, and the value of the option at any node depends on the probability that the price of the underlying asset will either decrease or increase at any given node.

Binomial trees are useful tools when pricing options and embedded options, but there is a fundamental flaw with the model. The problem lies in the possible values the underlying asset can take in one period time. In this model, the underlying asset can only be worth exactly one of two possible values, which is not realistic, as assets can be worth any number of values within any given range.

Investment dictionary. . 2012.

### Look at other dictionaries:

• Binomial heap — In computer science, a binomial heap is a heap similar to a binary heap but also supporting the operation of merging two heaps quickly. This is achieved by using a special tree structure. It is important as an implementation of the mergeable heap …   Wikipedia

• Binomial options pricing model — BOPM redirects here; for other uses see BOPM (disambiguation). In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. The binomial model was first proposed by Cox, Ross and… …   Wikipedia

• Binomial Option Pricing Model — An options valuation method developed by Cox, et al, in 1979. The binomial option pricing model uses an iterative procedure, allowing for the specification of nodes, or points in time, during the time span between the valuation date and the… …   Investment dictionary

• Tree Pangolin — Tree Pangolin[1] Conservation status …   Wikipedia

• Binomial nomenclature — In biology, binomial nomenclature is the formal system of naming specific species. The system is called binominal nomenclature (particularly in zoological circles), binary nomenclature (particularly in botanical circles), or the binomial… …   Wikipedia

• Tree (data structure) — A simple unordered tree; in this diagram, the node labeled 7 has two children, labeled 2 and 6, and one parent, labeled 2. The root node, at the top, has no parent. In computer science, a tree is a widely used data structure that emulates a… …   Wikipedia

• Tree model — Austro Asiatic Language Tree Maya Lan …   Wikipedia

• Tree Sparrow — Taxobox name = Tree Sparrow status = LC | status system = IUCN3.1 image caption = Adult plumage regnum = Animalia phylum = Chordata classis = Aves ordo = Passeriformes familia = Passeridae genus = Passer species = P. montanus binomial = Passer… …   Wikipedia

• Tree Swallow — Taxobox name = Tree Swallow status = LC | status system = IUCN3.1 image width = 250px range range map width = 200px regnum = Animalia phylum = Chordata classis = Aves ordo = Passeriformes familia = Hirundinidae genus = Tachycineta species = T.… …   Wikipedia

• Tree inventory — A tree inventory is the gathering of accurate information on the health and diversity of the community forest. [http://www.canr.uconn.edu Connecticut cooperative extension forestry] Uses Tree inventories focus on the attributes of individual… …   Wikipedia