Strategies and Replication Errors of Option Pricing Using Trinomial Model

Fanfei Chen ； Haoran Deng ； Mingheng Guo

《Frontiers in Economics and Management》 1卷12期 (2020/12) Pp. 118-126

https://doi.org/10.6981/FEM.202012_1(12).0018

摘要

Under the framework of the binomial model towards option pricing, this work aims to find a way to price options in the trinomial model, with detailed procedures using Python. Based on the limitation of the trinomial model, investors can't price an option perfectly by replicating portfolio. And this research constructs three different hedging strategies by adjusting the value of Ns (number of underlying assets). Monte-Carlo simulation was used in this report to compare the payoff errors and standard deviations between our strategies and the initial binomial model. The result shows all three methods produce similar tiny errors thus the authors think in the giving situation there's no obvious difference between these three models. The previous researches were focusing on figuring out the delta value by creating non-arbitrage models, to find the neutral probability, in the trinomial tree; this research is trying to modify the Ns model according to the giving nature probability in the trinomial tree.

關鍵字

Binominal Tree ； Trinomial Tree ； Delta Hedge ； Option Pricing ； Python

參考文獻

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