The binomial model for N-period european call option price

Abstract

Options are rights to buy or sell underlying assets for an exercise price (strike price), which is fixed by the terms of the option contract. In this research, option price fluctuations determined by stocks as its underlying asset. In binomial model, stock price fluctuations modeled by assuming that stock price will be in one of two circumstances at maturity date, namely rising or falling. Every possibility of stock value at maturity date can be used to discover every option value (payoff) so that it can be used as a consideration for the holder to execute the option and also for the writer to discover the maximum risk of loss. In this research the option price value Vn will be determined by the value of replication portfolio Xn formed through the hedging process in such a way that Vn = Xn for 1 n N.