A model that steps an asset price up or down at each of several periods, then values an option by working back from expiry. It can handle early exercise.
Where you will meet it
Binomial tree comes up in 4 learning outcome notes across the FRM syllabus.
A few of them:
Exotic Options FRM Part I · Financial markets and products
“In a binomial tree this is easy.”
Binomial Trees FRM Part I · Valuation and risk models
“A binomial tree prices an option by working backward from expiry.”
Arbitrage Pricing with Term Structure Models FRM Part II · Market risk measurement and management
“A binomial tree prices a zero-coupon bond by backward induction.”
Arbitrage Pricing with Term Structure Models FRM Part II · Market risk measurement and management
“In a non-recombining binomial tree an up move followed by a down move leads to a different node than a down move followed by an up move.”
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