binomial options model

A binomial options model is a way to calculate the value of a certain option (the right to buy or sell something at a certain price at a certain time). The model uses something called the binomial tree - a diagram that shows the different possible outcomes of the option. With the binomial tree, the model takes into account how likely any given outcome is, and what the value of the option would be in that situation. The model then combines all the outcome probabilities to calculate the overall value of the option.