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Trinomial model

  • trinomial model stock price converges to the geometric brownian motion:

    • trinomial stock price -> S(0)e^{u*M_{N}}
    • geometric brownian motion -> S(0)e^{sigma*W(t)}

    since u = sigma*sqrt(h/2*p) we have S(0)*e^{{sigma*sqrt(h/2*p)}*M_{N}} ~ S(0)e^{sigma*W(t)}