The binomial option pricing model will converge to what value as the number of periods increases?
A)a random value
B)the Black-Scholes-Merton value of the option
C)the intrinsic volatility of the option
D)the true value of the underlying
E)none of the above

Question

Quizplus · Accepted Answer

The binomial option pricing model is a discrete-time model that can be used to price options with multiple periods. As the number of periods increases, the binomial model will converge to the Black-Scholes-Merton (BSM) value of the option, which is the continuous-time equivalent of the binomial model. Therefore, choice B is the best answer as it reflects this convergence. Choices A, C, and D are incorrect as they do not accurately reflect the convergence of the binomial model.

The Binomial Option Pricing Model Will Converge to What Value