As the number of steps in the CRR binomial tree increases (keeping maturity fixed),the solution "converges" to a limit result.Which of the following statements characterizes this convergence best?
A)The solution results in the Black-Scholes formula.
B)The convergence may be oscillatory for even and odd number of steps in the tree.
C)The convergence may be monotonic for even and odd number of steps in the tree.
D)All of the above.

Question

Quizplus · Accepted Answer

The CRR (Cox-Ross-Rubinstein) binomial tree model, as the number of steps increases, indeed converges to the Black-Scholes formula, which is a continuous model for option pricing. This convergence can be oscillatory for even and odd numbers of steps, meaning the solution may slightly increase or decrease as the number of steps changes from even to odd or vice versa. This behavior does not preclude the overall convergence trend towards the Black-Scholes result.

As the Number of Steps in the CRR Binomial Tree