Yes, you're fully correct. I should have known better. :rofl:HallsofIvy said:
The Binomial or Black Scholes model is a mathematical formula used to calculate the theoretical value of financial options, such as stock options. It takes into account factors such as the current price of the underlying asset, the strike price, the time until expiration, and market volatility to determine the fair price of an option.
The Binomial or Black Scholes model is used by financial analysts and traders to determine the theoretical value of options and make informed decisions about buying and selling them. It is also used by companies to determine the fair value of employee stock options and by investors to assess the risk and potential return of different investment strategies.
The Binomial and Black Scholes models are both used to calculate the value of financial options, but they use different mathematical approaches. The Binomial model is a discrete model that breaks down time into smaller intervals, while the Black Scholes model is a continuous model that assumes a constant rate of change over time. The Binomial model is more accurate but also more computationally intensive, while the Black Scholes model is simpler and faster to calculate.
The Binomial and Black Scholes models make several assumptions, including that the underlying asset follows a lognormal distribution, there are no transaction costs or taxes, and there are no arbitrage opportunities. Additionally, the Black Scholes model assumes that the market is efficient and that the risk-free rate and volatility of the underlying asset are constant over time.
The Binomial and Black Scholes models are theoretical models and their predictions may not always match the actual market price of options. However, they are widely used and have been validated through extensive testing and research. They are considered to be valuable tools for estimating the fair value of options and making informed investment decisions.