Risk Latte - The Binomial Option Pricing Formula

The Binomial Option Pricing Formula

Rahul Bhattacharya
Mar 21, 2006

The binomial options pricing formula, which today is at the forefront of exotic options and derivatives pricing, was originally conceived of by William Sharpe in the mid 1970s, the Nobel Laureate.

Many think that the idea was originated with John Cox, Mark Rubenstein and Steve Ross and hence the famous Cox-Ross-Rubenstein tree (model) nomenclature. But John Cox was first introduced to this discrete time-discrete step methodology by William Sharpe one night at Stanford sometime in 1976. Of course the trio, John Cox, Mark Rubenstein and Steve Ross built upon this idea and formally developed the binomial option pricing model in 1978 and they deserve all the credit for this model. In fact, in Cox-Rubenstein alludes to that fact that their model is built upon William Sharpe's idea in their book.

Reference: Derivatives Strategy, April 1999 (The World According to William Sharpe)

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