When the number of time periods in a binomial model is large,a European call option value does what?
A)fluctuates around its intrinsic value
B)converges to a specific value
C)increases without limit
D)converges to the European lower bound
E)none of the above

Question

Quizplus · Accepted Answer

As the number of time periods in a binomial model increases, the binomial tree converges to the Black-Scholes model, which is a continuous-time model. In this case, the value of a European call option converges to a specific value calculated using the Black-Scholes formula.

When the Number of Time Periods in a Binomial Model