1 STEP STOCK PRICE MODEL

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Knowing the set of potential prices in the Future, and their probability, it is relatively straightforward to figure out  option prices.

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Below is a simplified stock price model that allows for 2 prices in the future, each with a 50% probability of happening. 

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We use the model to build intuition into option valuation concepts.

 

The Model equates the market price for a stock in the present to the probability weighted prices of the same stock in the future.