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arXiv · 2508.17014

Risk-Neutral Pricing of Random-Expiry Options Using Trinomial Trees

Sebastien Bossu·Michael Grabchak
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Abstract

Random-expiry options are nontraditional derivative contracts that may expire early based on a random event. We develop a methodology for pricing these options using a trinomial tree, where the middle path is interpreted as early expiry. We establish that this approach is free of arbitrage, derive its continuous-time limit, and show how it may be implemented numerically in an efficient manner.

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Sebastien Bossu, Michael Grabchak. 2025-08-23. Risk-Neutral Pricing of Random-Expiry Options Using Trinomial Trees. https://arxiv.org/abs/2508.17014

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