Comparison: Binomial model and Black Scholes model

Abstract

The Binomial Model and the Black Scholes Model are the popular methods that are used to solve the option pricing problems. Binomial Model is a simple statistical method and Black Scholes model requires a solution of a stochastic differential equation. Pricing of European call and a put option is a very difficult method used by actuaries. The main goal of this study is to differentiate the Binominal model and the Black Scholes model by using two statistical model - t-test and Tukey model at one period. Finally, the result showed that there is no significant difference between the means of the European options by using the above two models.

Keywords

• European options| Binominal model| Black Scholes model| t-test| Tukey model