Investments, tenth edition

 SUMMARY 

  

19

 Mark Rubinstein, “Implied Binomial Trees,”  Journal of Finance  49 (July 1994), pp. 771–818. 

  

20

 For an extensive discussion of these more general models, see R. L. McDonald,  Derivatives Markets,  3rd ed. 

(Boston: Pearson Education [Addison-Wesley], 2013). 

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P A R T   V I

  Options, Futures, and Other Derivatives

     4.   Options may be priced relative to the underlying stock price using a simple two-period, two-

state pricing model. As the number of periods increases, the binomial model can approximate 

more realistic stock price distributions. The Black-Scholes formula may be seen as a limiting 

case of the binomial option model, as the holding period is divided into progressively smaller 

subperiods when the interest rate and stock volatility are constant.