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Finance[GetProbabilities] - get probabilities of a tree node

Calling Sequence

GetProbabilities(T, i, j)

Parameters

T

-

binomial or trinomial tree data structure

i

-

positive integer; time step

j

-

positive integer; node index

Description

• 

At each level the nodes of a recombining tree are indexed from 1 to n (the number of tree nodes at this level), where 1 denotes the lowermost node and n denotes the uppermost node of the tree. The GetProbabilities command returns the list of transition probabilities for the node j at level i of the tree T. This command is related to the GetDescendants command in-as-much as the descendants  returned by GetDescendants and probabilities returned by GetProbabilities are ordered correspondingly.

• 

Note that the transition probabilities can be set using the SetProbabilities command.

Examples

withFinance:

First consider a trinomial tree approximating an Ornstein-Uhlenbeck process.

X:=OrnsteinUhlenbeckProcess0.1,1.0,0.03,0.3

X:=_X

(1)

T:=ShortRateTreeX,4,10

T:=moduleend module

(2)

Here is a plot of this tree.

TreePlotT,thickness=2,gridlines=true

Get descendants of the node 3 at level 3. The descendants belong to level 4.

GetDescendantsT,3,3

3,4,5

(3)

Get the corresponding probabilities.

GetProbabilitiesT,3,3

0.1507749899,0.6655866667,0.1836383434

(4)

This means that the probability of moving from node (3, 3) to node (4, 2) is approximately 0.15, the probability of moving from node (3, 3) to node (4, 3) is approximately 0.66 and the probability of moving from node (3, 3) to node (4, 4) is approximately 0.18.

In this example, set transition probabilities of a tree.

T:=TrinomialTree5,1,2,3,4,5,6,7

T:=moduleend module

(5)

GetProbabilitiesT,3,3

0.3333333333,0.3333333334,0.3333333333

(6)

SetProbabilitiesT,3,3,0.5,0.2,0.3

GetProbabilitiesT,3,3

0.5000000000,0.2000000000,0.3000000000

(7)

See Also

Finance[BinomialTree], Finance[GetDescendants], Finance[GetUnderlying], Finance[SetProbabilities], Finance[SetUnderlying], Finance[TrinomialTree]


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