Barrier option valuation with binomial model Binomial model Barrier options Formulas Application

Barrier options Down-and-out Down-and-in Up-and-out Up-and-in

Barrier levels Down-and-out: H < K Down-and-in: H < K Up-and-out: H > K Up-and-in: H > K

Binomial Model Proposed by cox, Ross and Rubinstein in 1979 Used for valuation of options. Its flexible, intuitive, base on random walks theory. Concept, price can go up or down during a single period of time. Movement of the price of underlying asset follow a binomial distrbution.

Formulas Down-and-in Down-and-out (Put option) Up-and-in Up-and-out (Call option) Up factor Down factor Riskless probability

Binomial tree

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