Microsoft PowerPoint - PoF.ppt

Multi-period binomial asset pricing modelƒ 223

If we choose , and a continuous interest rate convention then as the number of periods goes to

∞

, the probability distribution for the value of the

underlying asset approaches a normal distribution.

ƒ

The binomial model approximates the Black-Scholes model as

'

t

Æ

0, the price of a call computed using the binomial

model will approximate the Black-Scholes price.

t

e

u

Λ

=

σ

t

e

u

d

Λ

−

=

=

σ

1

Derivative securities: Options - Binomial asset pricing model