Multinomial Approximating Models for Options with k State Variables

Bardia Kamrad and Peter Ritchken
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Bardia Kamrad: Faculty of Decision Sciences, School of Business Administration, Georgetown University, Washington, D.C. 20057
Peter Ritchken: Department of Operations Research, Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106

Management Science, 1991, vol. 37, issue 12, 1640-1652

Abstract: Contingent claims whose values depend on multiple sources of uncertainty arise in many financial contracts and in the analysis of real projects. Unfortunately closed form solutions for these options are rare and numerical methods can be computationally expensive. This article extends the literature on multinomial approximating models. Specifically, new multinomial models are presented that include as special cases existing models. The more general models are shown to be computationally more efficient.

Keywords: contingent claims; option pricing; geometric Wiener processes; multinomial lattice (search for similar items in EconPapers)
Date: 1991
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:37:y:1991:i:12:p:1640-1652

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