Communications in Mathematical Finance

Valuation of Discrete Vanilla Options Using a Recursive Algorithm in a Trinomial Tree Setting

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• Abstract

  We present an extension or modification of a recursive algorithm to valuate discrete vanilla options in a trinomial tree setting. The algorithm only uses terminal values of the option as opposed to the standard method of simulating all nodal values for the entire tree. We then show that the option price under the said algorithm converges to the Black- Scholes price confirming its validity.