The Trinomial Asset Pricing Model

Options play an important part in financial markets. Throughout the years, several\npricing theories have been developed to generate fair prices for options of different sorts.\nIn this thesis we investigate the trinomial asset pricing model. After giving an explanation\nof its properties, we use the trinomial model to derive a fair price of standard\nEuropean options. We study the trinomial model approximation of the Black-Scholes\nprice and finally apply the trinomial model on six different exotic options.\nWe have found that, under certain conditions on the model parameters, the trinomial\nprice converges to the Black-Scholes price. Furthermore, we have established that pricing\nAmerican put options works well using the trinomial model. Regarding the investigated\nexotic options, we conclude that the trinomial model can often be suitable to use when\npricing exotic options that are not path dependent. In relation to the less advanced binomial\nmodel, the trinomial model has the advantage of converging to the Black-Scholes\nprice faster than the binomial model.