Finance and Derivatives: Theory and Practice Finance and Derivatives: Theory and Practice Sébastien Bossu and Philippe Henrotte The binomial model envisages only two outcomes for the final price of the underlying. The main advantage of this approach is its simplicity; however it is not very realistic. To make the model more convincing, we must develop it into multiple steps. An alternative approach can be worked out exploiting probabilities. 2 Chapter 7 Lognormal model