Binomial Lattice for mean-reverting process

[tcnewman]

Does anyone have direction as to how to implement a discreet time model for a mean reverting price (binomial, trinomial, etc... lattice)? I've been using monte carlo and the uhlenbeck ornestein process but there are limitations on how i view the hedging strategies and some further optionality from time0 to the contract month.

Thank you.

Troy

 

[Minh Tran]

I think we can start with simulating all possible outcomes of the underlying. Then using these values, calculating backwardly the lattice function with the risk-neutral probabilities. You may want to have a look at CRR model hope my humble opinion helps.

Regards,