TRINOMIAL METHOD FOR OPTION PRICING WITH TRANSACTION COSTS FOR SUPPLY CHAIN FINANCING

Abstract

In this study, we investigate the trinomial method for option pricing, incorporating trans- action costs into a discrete-time framework. Taking the binomial option pricing model in Cox et al. (1979) as a foundation, we further extend it to construct the trinomial model as referenced in Bjorefeldt et al. (2016). Our research examines the integration of transaction costs into three option pricing models – Black-Scholes, binomial, and trinomial – through the comparative analysis of the results. We also explore the application of the trinomial model as a pricing tool for supply chain financial products, aiming to address financial challenges faced by small and medium-sized businesses. Building upon the case studies outlined by Yun- zhang et al. (2021), we use the framework of American call options. Despite our efforts to integrate our model into the supply chain financing context, we have encountered challenges. Our current model, while proficient in handling fixed parameters, lacks the flexibility required to incorporate the variables needed in supply chain financing scenarios.