Skip to main content

How Does Increasing the Number of Steps in the Binomial Model Affect Its Accuracy?

Increasing the number of steps in the Binomial Model increases its accuracy. As the number of steps approaches infinity, the discrete-time Binomial Model converges to the continuous-time Black-Scholes model.

A higher number of steps provides a finer grid for the underlying price movement, allowing for a more precise determination of the optimal early exercise point.

How Does the Black-Scholes Model Handle the Early Exercise Feature of American Options?
How Does the Black-Scholes Model for Option Pricing Handle the Early Exercise Feature of American Options?
How Does the Law of Large Numbers Apply to Probabilistic Finality?
What Is the Main Trade-off between the Binomial Model and Numerical Methods Based on Black-Scholes?