What is binomial model?

The binomial model is a mathematical framework used in finance to price options and derivatives. It represents the possible paths an asset's price can take over time, typically using a discrete-time model where the price can move to two possible values (up or down) at each time step. This model is particularly useful for valuing American options, as it allows for the flexibility of exercising the option at multiple points before expiration. The binomial model can be used to approximate the Black-Scholes model for option pricing by increasing the number of time steps.