Journal of Finance and Economics
ISSN (Print): 2328-7284 ISSN (Online): 2328-7276 Website: http://www.sciepub.com/journal/jfe Editor-in-chief: Suman Banerjee
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Journal of Finance and Economics. 2019, 7(3), 81-87
DOI: 10.12691/jfe-7-3-1
Open AccessArticle

Pricing Options Using Trinomial Lattice Method

Kenneth Kiprotich Langat1, , Joseph Ivivi Mwaniki1 and George Korir Kiprop2

1School of Mathematics, University of Nairobi, Kenya

2Pan African University, Institute of Basic Sciences, Technology and Innovation, Nairobi, Kenya

Pub. Date: July 02, 2019

Cite this paper:
Kenneth Kiprotich Langat, Joseph Ivivi Mwaniki and George Korir Kiprop. Pricing Options Using Trinomial Lattice Method. Journal of Finance and Economics. 2019; 7(3):81-87. doi: 10.12691/jfe-7-3-1

Abstract

How much to spend on an option contract is the main problem at the task of pricing options. This become more complex when it comes to projecting the future possible price of the option. This is attainable if one knows the probabilities of prices either increasing, decreasing or remaining the same. Every investor wishes to make profit on whatever amount they put in the stock exchange and thus the need for a good formula that give a very good approximations to the market prices. This paper aims at introducing the concept of pricing options by using numerical methods. In particular, we focus on the pricing of a European put option which lead us to having American put option curve using Trinomial lattice model. In Trinomial method, the concept of a random walk is used in the simulation of the path followed by the underlying stock price. The explicit price of the European put option is known. Therefore at the end of the paper, the numerical prices obtained by the Black Scholes equation will be compared to the numerical prices obtained using Trinomial and Binomial methods.

Keywords:
options random walk trinomial lattice model Black-Scholes.

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

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