This article revisits the topic of two-state option pricing. It examines th
e models developed by Cox, Ross, and Rubinstein (1979), Rendleman and Bartt
er (1979), and Trigeorgis (1991) and presents two alternative binomial mode
ls based on the continuous-time and discrete-time geometric Brownian motion
processes, respectively. This work generalizes the standard binomial appro
ach, incorporating the main existing models as particular cases. The propos
ed models are straightforward and flexible, accommodate any drift condition
, and afford additional insights into binomial trees and lattice models in
general. Furthermore, the alternative parameterizations are free of the neg
ative aspects associated with the Cox, Ross, and Rubinstein model. (C) 2001
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