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2015•Unpublished venueRequires access

A DIRECT JUSTIFICATION OF THE BINOMIAL PRICING MODEL AS AN APPROXIMATION OF THE BLACK-SCHOLES FORMULA

X. Qu

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Abstract

This paper pedagogically presents a proof of the binomial option pricing model as an approximation of the Black-Scholes formula. The proof only requires basic calculus and a direct approximation of the binomial probability by the normal distribution is used.

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What this paper is about

This paper pedagogically presents a proof of the binomial option pricing model as an approximation of the Black-Scholes formula. The proof only requires basic calculus and a direct approximation of the binomial probability by the normal distribution is used.

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Available abstract

This paper pedagogically presents a proof of the binomial option pricing model as an approximation of the Black-Scholes formula. The proof only requires basic calculus and a direct approximation of the binomial probability by the normal distribution is used.

Key concepts: Black–Scholes model, Binomial approximation, Mathematics, Binomial distribution, Binomial options pricing model, Applied mathematics, Binomial (polynomial), Trinomial tree

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