When the Black-Scholes-Merton and binomial tree models are used to value an option on a non-dividend-paying stock,which of the following is true?
A) The binomial tree price converges to a price slightly above the Black-Scholes-Merton price as the number of time steps is increased
B) The binomial tree price converges to a price slightly below the Black-Scholes-Merton price as the number of time steps is increased
C) Either A or B can be true
D) The binomial tree price converges to the Black-Scholes-Merton price as the number of time steps is increased

Question

Quizplus · Accepted Answer

The binomial tree valuation method and the Black-Scholes-Merton formula are based on the same set of assumptions.As the number of time steps is increased the answer given by the binomial tree approach converges to the answer given by the Black-Scholes-Merton formula.

When the Black-Scholes-Merton and Binomial Tree Models Are Used to Value