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Multinomial Approximating Models for Options with k State Variables


  • Bardia Kamrad

    (Faculty of Decision Sciences, School of Business Administration, Georgetown University, Washington, D.C. 20057)

  • Peter Ritchken

    (Department of Operations Research, Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)


Contingent claims whose values depend on multiple sources of uncertainty arise in many financial contracts and in the analysis of real projects. Unfortunately closed form solutions for these options are rare and numerical methods can be computationally expensive. This article extends the literature on multinomial approximating models. Specifically, new multinomial models are presented that include as special cases existing models. The more general models are shown to be computationally more efficient.

Suggested Citation

  • Bardia Kamrad & Peter Ritchken, 1991. "Multinomial Approximating Models for Options with k State Variables," Management Science, INFORMS, vol. 37(12), pages 1640-1652, December.
  • Handle: RePEc:inm:ormnsc:v:37:y:1991:i:12:p:1640-1652

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