American Option Pricing Using Trinomial Tree Method
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The trinomial tree method represents a mathematical approach for pricing American-style options, featuring three possible price movements per time step compared to the binomial model's two. This implementation typically involves constructing a price lattice where each node calculates option values through backward induction, with early exercise features evaluated at every step. Key algorithmic components include volatility modeling using up, down, and stable movement probabilities, often implemented through vectorized operations for computational optimization. The enhanced nodal structure provides finer price resolution than binomial methods, yielding more precise results while maintaining O(n²) time complexity through efficient recursion handling. For comprehensive implementation details including probability calibration methods and boundary condition handling, refer to the accompanying documentation files.
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