Quadrinomial trees with stochastic volatility to value real options

Purpose The purpose of this article is to propose a detailed methodology estimate, model and incorporate the non-constant volatility onto numerical tree scheme, evaluate real option, using quadrinomial multiplicative recombination. Design/methodology/approach This uses method with volatility, based on stochastic differential equations GARCH-diffusion type value options when stochastic. Findings showed that in proposed tends zero, binomial traditional particular case, results are comparable between these methodologies, as well exact solution offered by Black–Scholes model. Originality/value originality paper lies try implicit (conditional) market assess, that, option tree, including into valuation underlying asset. main contribution formal derivation risk-neutral risk premium associated verifying condition via test simulated data, showing our proposal consistent Black Scholes formula trees method.