ABSTRACT
To find an explicit expression for the value of an option one needs a concrete mathematical model for the value of the underlying asset. In this chapter, we construct the geometric binomial model for stock price movement and use it to determine the value of a general European claim. An important consequence is the Cox-Ross-Rubinstein formula for the price of a call option. The valuation analysis in this chapter is based on the notion of self-financing portfolio described in Chapter 5.
