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If I have well understood, in the trinomial model we have a kind of risk neutral pricing formula that depends on a parameter. This means thaht as in the binomial model, we could use directly this formula to obtain the price of an option (European type) if there was not this dependency on a parameter. So the problem is to find the value of the parameter that gives a "fair price" ? However, in all I have mentioned, we do not talk about the hedging, so what link can be made with the hedging if there is one ?

In the binomial, it is clear since we can find by backward induction the perfect hedging and thus the price.

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  • $\begingroup$ @cpboy Are you looking for a way to calculate the fair value of an option using the trinomial option pricing model? $\endgroup$
    – Bob
    Jun 23 at 2:06
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    $\begingroup$ Yes because I don't know what criterion I should use here since the price is not unique, moreover, the price does not say nothing about the strategy the seller should follow to hedge his position, and it makes me uncomfortable $\endgroup$
    – coboy
    Jun 23 at 14:48
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    $\begingroup$ If an investor owns the ABC stock(ABC is a made up name) and the investor is looking to hedge and the price of a put on the stock is very cheap then buying the put makes a lot of sense to me. Of course you have to consider the tax consequences. Another option to consider would be selling a call. As such, I do not understand this comment by you: moreover, the price does not say nothing about the strategy the seller should follow to hedge his position $\endgroup$
    – Bob
    Jun 23 at 16:08
  • $\begingroup$ Thank you for your comment what you have said makes sense to me. For the comment you did not understand : in the trinomial model, I have found a formula to price a self financing portfolio (which is not unique) however, this price is not sufficient for the seller to be able to meet its commitments in the sense that we don't know the strategy to follow, whereas in the binomial model we have a formula for the strategy so when we have the initial price we know what to do with this money $\endgroup$
    – coboy
    Jun 23 at 16:39
  • $\begingroup$ I am sorry but my background is not sufficient to give you a proper answer. Good luck in solving your problem. $\endgroup$
    – Bob
    Jun 23 at 18:53

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