Mastering Python for Finance - Second Edition

Using a Leisen-Reimer tree

In the binomial models we discussed earlier, we made several assumptions about the probability of up and down states, as well as the resulting risk-neutral probabilities. Besides the binomial model with CRR parameters that we discussed, other forms of parameterization that are discussed widely in mathematical finance include the Jarrow-Rudd parameterization, Tian parameterization, and Leisen-Reimer parameterization. Let's take a look at the Leisen-Reimer model in detail.

Dr. Dietmar Leisen and Matthias Reimer proposed a binomial tree model with the purpose of approximating to the Black-Scholes solution as the number of step increases. It is known as the Leisen-Reimer (LR) tree, and the nodes do not recombine at ...