Cox-Ross-Rubinstein (Binomial Option Price) Model

In this example, we derived call and put option price using the binomial model, also known as the Cox-Ross-Rubinstein option model. The outcomes are shown in a format similar to that used for example 6. Note that binomial distribution will become normal when the number of steps (n) becomes large. Hence, when n increases, both of the call and put option prices estimated from the binomial model come close to the prices estimated from the Black-Scholes model. This phenomenon is shown on Figure 1. For example, the option prices estimated using the binomial model with 1,000 steps (in cells K13..K14) are equivalent (to 3 decimal places) to the prices estimated from the Black-Scholes model in cells H23..H24.