Numerical Analysis, Numerical Methods, Stability Test.
amplification factor is given by: A = 1 + 1/2 (ΔtσS)² − 1/2 rΔtS where Δt is the time step size, σ is the volatility of the underlying asset, S is the price of the underlying asset, and r is the risk-free interest rate. The binomial method is stable if A ≤ 1 for all possible values of S and Δt. The