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Approximating Diffusions with Trionomial Trees

Overview

In the following application, we show how tools from the Finance package can be used to approximate diffusions.

 

Trinomial trees are frequently used to approximate the movements in the price of a stock or other underlying asset.  These lattice based computational models are extensions of the binomial options pricing model.

μ=

σ=

dSt = μtdt+σSt, tdWt

 

 

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