Year: 2025
Type: article
Abstract: Option pricing is a fundamental aspect of the financial derivatives markets, and accurate models are essential for effective risk management and fair market pricing. While the binomial model is widely used due to its simplicity, it has limitations in capturing the complexity of real-world markets, especially when dealing with non-linear payoff functions or multi-asset portfolios. The trinomial model allows the underlying asset price to go up, down, or remain unchanged at each time step, providing a more flexible and accurate framework.This paper discusses the application of the trinomial model in option pricing, focusing on the premise of using the trinomial tree model under the assumption of no arbitrage market, and derives the price boundary of options by constructing a portfolio consisting of bonds, stocksand simple options using the risk-neutral method and the no-arbitrage principle. The resultsprovide valuable insights into option pricing and contribute to the theoretical understanding of option valuation in the discrete-time model. The resulting price boundaries help market participants identify potential arbitrage opportunities, ensure fair pricing, and ultimately enhancemarket efficiency. This work underscores the importance of considering more sophisticatedmodels like the trinomial tree in option pricing, and sets the stage for further research intomulti-period models and real-world market constraints.
Source: Theoretical and Natural Science
Authors: Kaiyang Zheng, Ziyan Cui, Weifeng Hu, Zixuan Shi
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W4410416937