Two Step Binomial Tree - European Call

This video prices a European call option on a two step binomial tree using risk-neutral probabilities. This video demonstrates that one can derive the price of a call option exactly under these conditions. In particular, it shows how to construct a portfolio without risk. If a portfolio has no risk, then it must earn the risk free rate. Using some basic algebra, one can derive the value of an option. This video covers some material in the Global Association of Risk Professionals (GARP) Financial Risk Management (FRM) Exam. In particular chapter 14 of the section on Valuation and Risk Models (VRM-14).