>
|
|
First consider a trinomial tree approximating an Ornstein-Uhlenbeck process.
>
|
|
| (1) |
>
|
|
| (2) |
Here is a plot of this tree.
>
|
|
Get descendants of the node 3 at level 3. The descendants belong to level 4.
>
|
|
| (3) |
Get the corresponding probabilities.
>
|
|
| (4) |
This means that the probability of moving from node (3, 3) to node (4, 2) is approximately 0.15, the probability of moving from node (3, 3) to node (4, 3) is approximately 0.66 and the probability of moving from node (3, 3) to node (4, 4) is approximately 0.18.
In this example, set transition probabilities of a tree.
>
|
|
| (5) |
>
|
|
| (6) |
>
|
|
>
|
|
| (7) |