Risk-Neutral Pricing of Random-Expiry Options Using Trinomial Trees
Pricing of Securities
2025-08-26 v1 Computational Finance
Abstract
Random-expiry options are nontraditional derivative contracts that may expire early based on a random event. We develop a methodology for pricing these options using a trinomial tree, where the middle path is interpreted as early expiry. We establish that this approach is free of arbitrage, derive its continuous-time limit, and show how it may be implemented numerically in an efficient manner.
Keywords
Cite
@article{arxiv.2508.17014,
title = {Risk-Neutral Pricing of Random-Expiry Options Using Trinomial Trees},
author = {Sebastien Bossu and Michael Grabchak},
journal= {arXiv preprint arXiv:2508.17014},
year = {2025}
}
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25 pages