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discuss the limitations of binomial pricing option

discuss the limitations of binomial pricing option

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Answer #1

Limitations of binomial model.

The main limitation of the binomial model is its relatively slow speed. It's great for half a dozen calculations at a time but even with today's fastest PCs it's not a practical solution for the calculation of thousands of prices in a few seconds.

The second disadvantage of the binomial options pricing model is its complexity. The complexity increases when computing multiple period binomial model.

Thirdly, it is based on assumptions. If the assumption are violated, then we cannot use the model.

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