Why given method provides reasonable estimate of an option

Reference no: EM132043740

Qusetion: The general binomial method for option pricing has, at its root, the valuation of a one-period option on a stock with only two possible future values (by constructing a portfolio consisting of shares of the stock and borrowing that has the same value in period one as the option). Explain why this method provides a reasonable estimate of the value of an option. (Or, what assumptions must hold about the future value of an asset in order for the option price calculated using the binomial method to be true?)

Reference no: EM132043740

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