I have an employee stock options trinomial model that was coded in VBA in Excel that is currently working properly, however, there is a need to have varying risk-free, dividend yield, and volatility over time. Essentially, the problem I'm having is I cannot figure out the underlying mathematics of doing so, such that the trinomial tree is a recombining tree. I need help in this regard if anyone has the expertise to assist me. I may have the approach on this one wrong as well, and quite possibly another solution is the way to go to allow for varying rates, but I could use someone with the expertise to assist. I will provide the options file later, but need to know that you understand the solution to the problem before we begin.
Additional Project Description:
05/07/2013 at 15:07 CEST
I would like to clarify the issue I am having is not a VBA coding problem, it's a mathematical/conceptual problem. You do not need my file to understand the issue. I will discuss further with you but please provide some information around how you would address the problem or how you think it should be done and I will be willing to discuss with you more in depth.
Let's take a 3 year trinomial model, right now my model assumes volatility, risk free, and dividend yield are all constant for all three years. However, I would like these to change in year 2 and conceptually once you change these the tree is no longer a recombining tree under the standard model and I would like help on figuring out how to solve this issue.