In order to tabulate the various possibilities that may confront an investor, various kinds of mathematical models have been derived. The results produced using these models are typically known as derivatives and tend to highlight various strategies and their corresponding investment results.
The various mathematical models used for tabulating financial possibilities in general and stock based possibilities in particular are the Black Scholes model, the Monte Carlo model and the binomial options pricing model. Each different model has its own peculiar merits and demerits making each model suitable for tabulating different kinds of market conditions and investment strategies. The Black Scholes model is employed in order to tabulate continuous data and time investment possibilities. On the other hand, the Monte Carlo model is used to deal with complex data relationships where several variables are often interlinked to affect the final outcomes. The Monte Carlo model is seen as being too excessive in terms of computational usage and time usage for use in regular financial modelling.
In contrast to the Black Scholes and the Monte Carlo models, the binomial options pricing model is used in situations where the underlying asset is not suspected to vary by a large degree. In addition, another major difference between the binomial options pricing model and the Black Scholes and the Monte Carlo model is the use of discrete data points. The binomial options pricing model is used in situations where discrete information relating to the financial model is available. Both the Black Scholes model and the Monte Carlo model use continuous data instead of discrete data to predict financial behaviour. This has significant impacts on the formulation and the outcome of the overall financial problem.
The binomial options pricing model is generally formulated in the form of a discrete