Abstract
AbstractThe use of the numerous variants of binomial trees in option pricing is ubiquitous. They are not only easy to understand and to implement, but also range among the most efficient methods for many pricing problems. However, there are at least two main problems regarding their application: In multi‐asset markets, conventional tree construction methods cannot ensure well‐defined transition probabilities for any desired correlation structure between the assets. Furthermore, binomial tree methods often exhib‐it an irregular convergence behavior of the option prices computed for a decreasing sequence of step sizes (i.e. for a sequence of growing trees). The most prominent example of irregular behavior is the so‐called sawtooth effect. In this article we will present a universal method that can overcome both problems at once. Copyright © 2009 Wilmott Magazine Ltd
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