Editing Binomial options pricing model (section)

==Relationship with Black–Scholes==
Similar [[Black–Scholes#The model|assumptions]] underpin both the binomial model and the [[Black–Scholes|Black–Scholes model]], and the binomial model thus provides a [[Discrete time and continuous time|discrete time]] [[approximation]] to the continuous process underlying the Black–Scholes model. The binomial model assumes that movements in the price follow a [[binomial distribution]]; for many trials, this binomial distribution approaches the [[log-normal distribution]] assumed by Black–Scholes. In this case then, for [[European option]]s without dividends, the binomial model value converges on the Black–Scholes formula value as the number of time steps increases.<ref name="Joshi" /><ref name="Chance">Chance, Don M. March 2008 [http://www.henley.ac.uk/web/files/rep/binomial_option.pdf ''A Synthesis of Binomial Option Pricing Models for Lognormally Distributed Assets''] {{Webarchive|url=https://web.archive.org/web/20160304023210/http://www.henley.ac.uk/web/files/rep/binomial_option.pdf |date=2016-03-04 }}. Journal of Applied Finance, Vol. 18</ref>

In addition, when analyzed as a numerical procedure, the CRR binomial method can be viewed as a [[special case]] of the [[Finite difference method#Explicit method|explicit finite difference method]] for the Black–Scholes [[Partial differential equation|PDE]]; see [[finite difference methods for option pricing]].<ref>{{cite journal|last=Rubinstein |first=M. |year=2000 |title=On the Relation Between Binomial and Trinomial Option Pricing Models |journal=[[Journal of Derivatives]] |volume=8 |issue=2 |pages=47–50 |url=//www.in-the-money.com/pages/author.htm |doi=10.3905/jod.2000.319149 |url-status=dead |archive-url=https://web.archive.org/web/20070622150346/http://www.in-the-money.com/pages/author.htm |archive-date=June 22, 2007 |citeseerx=10.1.1.43.5394 |s2cid=11743572 }}</ref>