What are the shortcomings of the binomial pricing model?
b) Binomial pricing model doesnt provide for the possibility of
price of the underlying remaining the same between two consecutive
time points (it assumes that either the price could go up or could
come down; it completely ignores the possibility of the price not
changing at all) a) Binomial pricing model breaks up the time to
the expiry of option in to a limited number of time intervals and
hence, the price calculated through binomial trees is more of a
broad approximation of the actual price. (Compare this with Black
Scholes (BS) Model which gives a more accurate approximation
because the BS model involves breaking the time to expiry into
infinitesimaly small time intervals).