Black-Scholes and Binomial Models
The variables that impact the pricing of options consist of the following basic factors: the underlying stock price, the strike price of the option, the time until expiration of the option, volatility, interest rates, and dividends (Folger, 2015). However, how these factors are perceived differs according to the model used to gauge the value of the option. The Black-Scholes model and the binomial model differ in their approach to valuing options.
The Black-Scholes model was developed for European put and call options and makes certain assumptions -- namely, that the option cannot be exercised early, that dividends are not a factor (though an ex-dividend addendum to the model has been produced in more recent years), that there are no commission fees involved, that volatility is constant and that the underlying's returns are normally distributed.
The Binomial Model also makes some assumptions -- namely that the market is efficient (which in today's world of centrally planned markets that rise and fall on a few words from Yellen or Draghi seems to be not the case at all) -- and it also simplifies the option by shortening its time and removes the possibility...
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