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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.
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The binomial model approximates the Black-Scholes model as

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t

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0, the price of a call computed using the binomial

model will approximate the Black-Scholes price.

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Derivative securities: Options - Binomial asset pricing model

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