Trinomial Option Pricing Model

DEFINITION of 'Trinomial Option Pricing Model'

An option pricing model incorporating three possible values that an underlying asset can have in one time period. The three possible values the underlying asset can have in a time period may be greater than, the same as, or less than the current value.

BREAKING DOWN 'Trinomial Option Pricing Model'

The trinomial option pricing model differs from the binomial option pricing model in one key aspect, which is incorporating another possible value in one periods time. Under the binomial option pricing model, it is assumed that the value of the underlying asset will either be greater than or less than, its current value. The trinomial model, on the other hand, incorporates a third possible value, which incorporates a zero change in value over a time period.

This assumption makes the trinomial model more relevant to real life situations, as it is possible that the value of an underlying asset may not change over a time period, such as a month or a year.

Trading Center