Equity Derivatives and Structured Products Glossary: Exploded tree


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Equity Derivatives and Structured Products Glossary

Exploded tree

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Exploded tree

Exploded tree

A tree (binomial or trinomial) in which an up step followed by a down step gives a different outcome to a down step followed by an up step. Consequently, the number of nodes increases exponentially, compared with a recombining tree, in which the number increases quadratically. This makes their evaluation exceptionally computer-intensive. The advantage is that they can be used to price path-dependent options and they are important for modelling Interest rate options.

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