How Does the Binomial Model Handle the Volatility Input? ▴ Learn

How Does the Binomial Model Handle the Volatility Input?

The Binomial Model uses the volatility of the underlying asset to calculate the size of the up and down movements (the 'up' and 'down' factors) in the price tree. Higher volatility leads to larger up and down factors, resulting in a wider price tree and a higher option price.

The volatility input is a crucial determinant of the model's output.

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