Binomial Option Pricing Model: Tree Extensions

Binomial trees with more steps can improve the accuracy of the calculation of the option price, but this also increases the computational work needed. To improve price estimates in certain cases, the binomial method has been extended to the control variate technique and the equal probability binomial tree, which we will outline here. We conclude with a discussion of the problems presented by the payment of dividends and a look at a solution to this problem.