Willow Power : Optimizing Derivative Pricing Trees

A new type of recombining derivative pricing tree is presented as an alternative to standard binomial and trinomial trees. This tree, called the quot;Willowquot; tree, expands as the square root of time and therefore avoids the unnecessary computations that are performed in the quot;wingsquot; of standard binomial and trinomial trees. It is shown that arranging the tree in accordance with the process being modelled gives dramatic improvements in computational efficiency