Chapter 20 and 21, binomial method

yz1@chrysler.com
Wed, 16 Sep 1998 10:06:03 -0400

This is about the binomial method for option pricing, which is introduced
in Chap 20 and used extensively in Chap 21. I found all the examples and
problems in the book implicitly contain the assumption
1 + upside change = 1 / (1 + downside change)
for instance,
1 + 0.25 = 1/ (1 - 0.20) (page 575)
1 + 0.33 = 1/ (1 - 0.25) (page 595)
But this assumption is not need to apply the binomial method. So why is it
there?

I also noticed that if we are to use the multistep binomial method to
approximate the Black-Scholes, the assumption is implied (see page 598, 1 +
downside change = d = 1/u = 1 / (1 + upside change)). Is this why the
assumption is generally made?

Kevin