An Adjusted Trinomial Lattice for Pricing Arithmetic Average Based Asian Option

摘要

An adjusted trinomial model for pricing both European and American arithmetic average-based Asian options is proposed. The Kamrad and Ritchken trinomial tree governs the underlying asset evolution. The algorithm selects a subset of the true averages realized at each node to serve as the representative averages. The option prices are then computed via backward induction and interpolation. The results show that the trinomial method produces more accurate prices especially in the case of European style Asian options.