What Is the ‘Risk-Neutral’ Valuation Principle Used in the Binomial Model?

The risk-neutral valuation principle states that the value of any financial asset, including an option, can be determined by assuming investors are indifferent to risk. In the Binomial Model, this means the option is priced by discounting the expected future payoff at the risk-free rate, where the expectation is calculated using the risk-neutral probabilities of the up and down movements.