Tree methods

Jérôme Lelong (1, 2) , Antonino Zanette (1, 3)

1 MATHFI - Financial mathematics
2 MATHFI - Mathématiques financières
3 Università degli Studi di Udine - University of Udine [Italie]

Tree methods are among the most popular numerical methods to price financial derivatives. Mathematically speaking, they are easy to understand and do not require severe implementation skills to obtain algorithms to price financial derivatives. Tree methods basically consist in approximating the diffusion process modeling the underlying asset price by a discrete random walk. In this contribution, we provide a survey of tree methods for equity options, which focus on multiplicative binomial Cox-Ross-Rubinstein model.

Domaines: Probabilités [math.PR]; Pricing [q-fin.PR]

Jérôme Lelong, Antonino Zanette. Tree methods. Rama Cont. Encyclopedia of Quantitative Finance, John Wiley & Sons, Ltd., 7 p., 2010, ⟨10.1002/9780470061602.eqf12017⟩. ⟨hal-00776713⟩