Binomial and Trinomial Trees
Binomial and trinomial trees are very popular tools commonly used in practice to calculate prices and sensitivity parameters of derivatives while avoiding direct reference to the fundamental differential equations governing the price of the instrument. These methods provide a useful alternative to those (numerical or analytical) methods presented in the previous sections for solving differential equations. In principle (ignoring for the moment the potential computing-time problems), binomial and trinomial trees can also be used in pricing path-dependent derivatives.
KeywordsRandom Walk Option Price Internal Model Dividend Yield Spot Price
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