DEFINITION of 'Boolean Algebra'
A division of mathematics which deals with operations on logical values. Boolean algebra traces its origins to an 1854 book by mathematician George Boole. The distinguishing factor of Boolean algebra is that it deals only with the study of binary variables. Most commonly boolean variables are presented with the possible values of 1 ("true") or 0 ("false"). Variables can also have more complex interpretations, such as in set theory.
INVESTOPEDIA EXPLAINS 'Boolean Algebra'
Boolean algebra has application in finance through mathematical modeling of market activities. For example, research into the pricing of stock options involved the use of a binary tree to represent the range of possible outcomes in the underlying security. In this binomial options pricing model, the boolean variable represented an increase or a decrease in the price of the security.
This type of modeling was necessary because in American options, which can be exercised at any time, the path of security prices is just as important as the final price. The weakness of this model was that the path of a security's price had to be broken into a series of discrete time steps. Thus, the Black Scholes options pricing model provided a breakthrough in that it was able to price options under the assumption of continuous time. The binomial model is still useful for situations in which the Black Scholes cannot be applied.

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A derivative is a type of security in which the price of the security is dependent on one or more underlying assets. A derivative ... Read Full Answer >> 
What is an overthecounter derivative?
A derivative is a type of security in which the price of the security depends on the price of the underlying asset. Depending ... Read Full Answer >> 
What does the underlying of a derivative refer to?
A derivative security is a financial instrument in which the price of the derivative is dependent on its underlying asset. ... Read Full Answer >> 
What kinds of derivatives are types of contingent claims?
A contingent claim is another term for a derivative with a payout that is dependent on the realization of some uncertain ... Read Full Answer >> 
What is the difference between the cost of capital and the discount rate?
The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >> 
What does it mean to take delivery of a derivative contract?
When trading derivative contracts for options, a buyer or holder may have to take delivery of the underlying asset if the ... Read Full Answer >>

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