Pricing Options Using Binomial Trees

Carl Chiarella*, Xue Zhong He, Christina Sklibosios Nikitopoulos

*Corresponding author for this work

Research output: Chapter in Book or Report/Conference proceedingChapterpeer-review


This chapter presents the binomial tree approach to the option pricing problem. We first illustrate the basic ideas of option pricing by considering the one-period binomial tree model and then extend to a multi-period binomial tree model. We then show that, by taking limits in an appropriate way, the binomial expression for the option price converges to the Black–Scholes option price and pricing equation. Alternatively, the continuous time model can be discretised in a way that yields the same expressions as obtained by the binomial tree approach.

Original languageEnglish
Title of host publicationDynamic Modeling and Econometrics in Economics and Finance
PublisherSpringer Science and Business Media Deutschland GmbH
Number of pages17
Publication statusPublished - 2015
Externally publishedYes

Publication series

NameDynamic Modeling and Econometrics in Economics and Finance
ISSN (Print)1566-0419
ISSN (Electronic)2363-8370


  • Continuous Time
  • Continuous Time Model
  • European Call Option
  • Option Price
  • Stock Price


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