# one and two period binomial model

How important is it really? I did it a while back and can’t really remember it (for futures contracts)

hummm, you dont use binomial for futures contracts my friend… anyway, i would think there will be a binomial model question on the exam for sure so i would know it… it is really very simple, look at it and let us know if there is something you dont get

There are several binomial models in the CFAI material. Backward induction on bonds is one and Options is another. They are calculated quite differently so I would not think that “just knowing the concept” will work here. For example with options you need to know how to calc the down move and the risk neutral prob of up and down. Then you need to apply the probability to the option payoff not the value of the up and down figures. Its not hard but if you don’t know the steps you will miss and easy answer

Alright thanks guys, I know the binomial tree for interest rates and the backward induction really well. But I’m going over the options chapter and I can’t remember the discrete time model but you guys are right, I should definitely go over it one more time, it can definitely be an easy mark I would prefer they ask something on the continuous time model since I already know how to calculate the price of a call and put from there! Thanks gulf, I meant options sorry!

" continuous time model " if by this you meen black and scholes… you know something that is useless for the exam…you are not required to know how to value using black and scholes for the exam, just how inputs affect value which is common sense…

the binomial model for interest rates/fixed income is one i never got. the one for options is easier for me. remembering the formulas is another matter. Any easy way for the binomial on FI?

why would teh FI model be harder… in the options one (stock options), you have to calculate the up or down as well as probabilities in the fixed income one, you are given a tree, probability is assume 50% up and 50% down (unless told otherwise which is unlikely) you start at the end of the tree, cause you know for sure at expiration you will get (face value+coupon) and you work your way back…easy study it then ask here…

I agree with gulfcfa…though he seems a bit angry. Let’s hope his day gets better

hahaha you guys crack me up! Gulf can be as mad as he wants, he still has been a great help along this whole hell of a ride!

Geez, chill. I was just saying it’s more difficult for me. Fixed income has always been my weakness so you could’ve just given tips instead of adding unnecessary and unsolicited mad comments. Don’t expect people to find everything to be at the same level of difficulty as you do.