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discrete method of options pricing involves a decision tree which maps possible
outcomes at succeeding points in time : probabilities are assigned to each
possible outcome, and the value of the option is determined by the likelihood
of each outcome at the time of the option's expiration discounted to the present moment . the value will
depend on several factors, including the number of periods, or time, and
the volatility, or how far the price moves for each node on the decision
tree . this method reduces all possible future outcomes, or choices,
to the present moment using the statistical likelihood of each possible
future choice : the underlying will have an actual
value as time progresses, but for the present moment, the option price
is the single value of all future movements of the underlying |
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