The Trinomial tree is a discretized description of geometric Brownian motion which is often used to describe asset behavior. The structure is a recombining tree where the asset S can move up, mid or down.
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u
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Up-factor
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d
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Down-factor
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Volatility
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t
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Timestep
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Y
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Yield of the underlying, for stocks Y=r (interest rate), futures Y=0, currencies Y=(domestic interest rate-foreign interest rate)
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S
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Present value of the asset
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Value of the asset after a up movement
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Value of the asset after a mid movement
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Value of the asset after a down movement
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Probability of an up movement
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Probability of a mid movement
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Probability of a down movement |
