A simple numerical example (based on Sharpe 1978, pp. 366-373) captures important features of option pricing in a model that is extremely straightforward but nevertheless possesses essential aspects of more complex models. The setting in the model is "binomial": in any given time period, the price of a stock can only do two things, rise by a set amount or fall by a set amount. (To make the model more realistic, we would have to examine the path of a stock price over many such periods, as in the Cox-Ross-Rubinstein model discussed below, but the main points emerge when considering a single period.) In the model it is assumed that investors can both lend and borrow at the riskless rate of interest of, let us say, 5 percent a year that the stock pays no dividends and can be sold short without penalty, and that buying or selling stock or options incurs no transaction costs.

Donald MacKenzie, An Engine, Not a Camera, loc. 1274