In this chapter, we looked at a number of numerical procedures in derivative pricing, the most common being options. One such procedure is the use of trees, with binomial trees being the simplest structure to model asset information, where one node extends to two other nodes in each time step, representing an up state and a down state, respectively. In trinomial trees, each node extends to three other nodes in each time step, representing an up state, a down state, and a state with no movement, respectively. As the tree traverses upwards, the underlying asset is computed and represented at each node. The option then takes on the structure of this tree and, starting from the terminal payoffs, the tree traverses backward and toward the root, which converges to the current discounted option price. Besides binomial and trinomial trees, trees can take on the form of the...
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You're reading from Mastering Python for Finance. - Second Edition
James Ma Weiming is a software engineer based in Singapore. His studies and research are focused on financial technology, machine learning, data sciences, and computational finance. James started his career in financial services working with treasury fixed income and foreign exchange products, and fund distribution. His interests in derivatives led him to Chicago, where he worked with veteran traders of the Chicago Board of Trade to devise high-frequency, low-latency strategies to game the market. He holds an MS degree in finance from Illinois Tech's Stuart School of Business in the United States and a bachelor's degree in computer engineering from Nanyang Technological University.
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James Ma Weiming is a software engineer based in Singapore. His studies and research are focused on financial technology, machine learning, data sciences, and computational finance. James started his career in financial services working with treasury fixed income and foreign exchange products, and fund distribution. His interests in derivatives led him to Chicago, where he worked with veteran traders of the Chicago Board of Trade to devise high-frequency, low-latency strategies to game the market. He holds an MS degree in finance from Illinois Tech's Stuart School of Business in the United States and a bachelor's degree in computer engineering from Nanyang Technological University.
Read more about James Ma Weiming