Explain the difference between a recombining and non-recombining tree. which one is more desirable? explain why?

The following is the difference between recombining and non-recombining tree:

In a recombining binomial tree with a value of u and d, we assume that the proportionate increase or decrease in a underlying security price are held to be constant at each step throughout the tree. Therefore, the security price remains the same even after various ups and down movements occurred.

On the other hand, in a non-recombining binomial tree the values of u and d change at every stage. The two new nodes are to be generated by each node in the tree. So, this will make the tree much larger than the recombining tree.

For example, if there are 10 nodes then 10 prices in a recombining tree and 1024 () in a non- recombining tree.  It becomes computationally intensive as the n increases.

Therefore, recombining tree is more desirable than  non-recombining tree.

i'ts proportional. if the inflation rate is 12% for example, the cpi will be 12% less.

hope it ,

bioteacher101

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