LO 11.9: Evaluate the advantages and disadvantages o f reducing the size o f the

LO 11.9: Evaluate the advantages and disadvantages o f reducing the size o f the time steps on the pricing o f derivatives on fixed income securities.
For the sake of simplicity, the previous example assumed periods of six months. Flowever, in reality, the time between steps should be much smaller. As you can imagine, the smaller the time between steps, the more complicated the tree and calculations become. Using daily time steps will greatly enhance the accuracy of any model but at the expense of additional computational complexity.
F i x e d -In c o m e S e c u r i t i e s a n d B l a c k -S c h o l e s -M e r t o n

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