References for DTSP – M5: The Binomial Model

Please, remember that these references are just to provide you with extra resources and examples,
they are no substitute of the main course note by any means.

- On reference books.
o For the case of the binomial model, I would focus primarily in the following book
which covers all the main issues regarding the model:
§ “The Binomial Asset Pricing Model”, by Steven E. Shreve, Ed. Springer.

- Here are a couple of video-format examples on the basic use of the binomial model:
o A basic example of option pricing and portfolio replication:
§ https://www.youtube.com/watch?v=1p5wJxGNj1Q

o Another example of basic option pricing, including hedging ratio and other features:
§ https://www.youtube.com/watch?v=27lw6K9SZrQ

o Here’s an extension of one-period binomial models to multi-period ones from

Columbia University.
§ https://es.coursera.org/lecture/financial-engineering-1/the-multi-period-
binomial-model-HRuwU

o As you may notice, most of these video-examples are pretty light on the mathematical
work. The fact that we, in the course, impose more rigorous mathematical frameworks
is just because this will easy things up when taking the leap to Continuous stochastic
processes. Essentially, you will see that intuition and results are the same.

o Also notice that most of these examples already deal with discount rates. We have not
entirely dealt with this, as the risk-free asset always pays the same amount (does not
change over time). Do not worry if you do not completely get this part on discounting,
it will become clear along time.

- You will find a lot of interesting resources on the binomial asset pricing model online. I will
leave up to you to go deeper in this topic now, as I think it is somewhat easy to grasp the main
ideas and don’t want to overload your coursework with references. We will definitely come
back to the binomial model for pricing in future courses. Despite its simplicity, the model is
specially helpful to value path-dependent instruments such American options.