Overview - 2023.2 English

Vitis Libraries

Release Date
2023.2 English

Tree Lattice is among the most commonly used tools to price options in financial mathematics. In general, the approach is to divide time from now to the option’s expiration into N discrete periods. At the specific time n, the model has a finite number of outcomes at time n + 1 such that every possible change in the state of the world between n and n + 1 is captured in a branch. This process is iterated until every possible path between n = 0 and n = N is mapped. Probabilities are then estimated for every n to n + 1 path. The outcomes and probabilities flow backwards through the tree until a fair value of the option today is calculated (from wikipedia) .