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Risk-Neutral Pricing of Random-Expiry Options Using Trinomial Trees

Published 23 Aug 2025 in q-fin.PR and q-fin.CP | (2508.17014v1)

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.

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