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2007•Journal of Inner Mongolia University of Science and TechnologyRequires access

Binomial approximation of Black-Scholes formula

Shi Ping

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Abstract

Black-Scholes model is an option pricing formula derived under the assumption of no arbitrage,continuous stock price and following geometric Brown movement.Binomial tree pricing model is derived under the assumption of discrete stock price following binomial distribution.A method to prove the binomial approximation of Black-Scholes formula was purposed under specific assumption.This proof will provide an insight on the relationship of option pricing between discrete and continuous time model.

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What this paper is about

Black-Scholes model is an option pricing formula derived under the assumption of no arbitrage,continuous stock price and following geometric Brown movement.Binomial tree pricing model is derived under the assumption of discrete stock price following binomial distribution.A method to prove the binomial approximation of Black-Scholes formula was purposed under specific assumption.This proof will provide an insight on the relationship of option pricing between discrete and continuous time model.

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Available abstract

Black-Scholes model is an option pricing formula derived under the assumption of no arbitrage,continuous stock price and following geometric Brown movement.Binomial tree pricing model is derived under the assumption of discrete stock price following binomial distribution.A method to prove the binomial approximation of Black-Scholes formula was purposed under specific assumption.This proof will provide an insight on the relationship of option pricing between discrete and continuous time model.

Key concepts: Black–Scholes model, Binomial options pricing model, Mathematics, Finite difference methods for option pricing, Binomial distribution, Trinomial tree, Valuation of options, Binomial approximation

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