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.
INVESTOPEDIA EXPLAINS '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.

Gamma Pricing Model
An equation for determining the fair market value of a Europeanstyle ... 
Option
A financial derivative that represents a contract sold by one ... 
Option Pricing Theory
Any model or theorybased approach for calculating the fair ... 
Binomial Option Pricing Model
An options valuation method developed by Cox, et al, in 1979. ... 
Down Transition Probability
The probability that an asset's value will decline in one period's ... 
Underlying
1. In derivatives, the security that must be delivered when a ...

How do I measure option liquidity?
An option is a financial instrument that gives the holder the right to purchase shares in a company at a certain set price ... Read Full Answer >> 
What does the underlying of a derivative refer to?
A derivative security is a financial instrument in which the price of the derivative is dependent on its underlying asset. ... Read Full Answer >> 
What kinds of derivatives are types of contingent claims?
A contingent claim is another term for a derivative with a payout that is dependent on the realization of some uncertain ... Read Full Answer >> 
What is the difference between the cost of capital and the discount rate?
The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >> 
What does it mean to take delivery of a derivative contract?
When trading derivative contracts for options, a buyer or holder may have to take delivery of the underlying asset if the ... Read Full Answer >> 
How can derivatives be used for speculation?
Derivative securities could be bought or sold to speculate on the future price of the underlying assets. Derivative securities' ... Read Full Answer >>

Options & Futures
Reducing Risk With Options
If you want to use leverage to your advantage, you must know how many contracts to buy. 
Options & Futures
Option PriceVolatility Relationship: Avoiding Negative Surprises
Learn about the pricevolatility dynamic and its dual effect on option positions. 
Fundamental Analysis
Calculating Future Value
Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. 
Economics
What is Deadweight Loss?
Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. 
Economics
How to Do a CostBenefit Analysis
The benefits of a given situation or businessrelated action are summed and then the costs associated with taking that action are subtracted. 
Fundamental Analysis
Calculating the HerfindahlHirschman Index (HHI)
The HerfindhalHirschman Index, (HHI) is a measure of market concentration and competition among market participants. 
Investing
What More Volatility Means For Momentum Stocks
One byproduct of the recent tick higher in bond yields: a meaningful rise in volatility for both stocks and bonds. 
Investing
How To Implement A Smart Beta Investing Strategy
Smart beta investing is the notion of rewriting investment rules to improve investment outcomes by targeting exposures to intuitive ideas or factors. 
Options & Futures
How & Why Interest Rates Affect Options
The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations. 
Investing
Market Crisis: Does Diversification Still Work?
If you still aren’t sold on the benefits of international diversification, you may object that: Diversification didn’t work during the last market crisis.