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Pricing Put Options with the Trinomial Method
Pricing Put Options with the Trinomial Method
This Demonstration applies the trinomial method (also known as the "three-jump process" [2]) to approximate the value of a put option. Use the controls to set the option's parameters and the time discretization, in order to approximate the American and the European puts. The European put can be exercised only at its maturity, while the American put can be exercised at any time up to maturity. The early exercise boundary is shown with the red line; whenever the asset price drops below this boundary, the American put's intrinsic value becomes greater than its holding value, and it is optimal for the holder to exercise the option. Random trinomial paths show where the asset price is more likely to move.