This paper applies Hull & White's Trinomial Tree method to the Eurodollar Futures Options. The parameters required in the model,speed coefficient and interest rate volatility, are estimated by the trial and error so that minimize the squared sum of the difference between the market price and the model price.
Our result showed that the option prices in this model increase as the speed coefficients decrease and as the volatilities increase.
We tried to estimate these parameters in three different ways and applied then for two different periods. The result showed that the shorter term data were better than the longer term data for the estimation. The result was better when estimated the parameters seperately for each options maturities than when estimated them for the whole set of option maturities. Once estimated, it showed somewhat reasonable result only when they were applied to the immediate following short period after the estimation. This result shows that those parameters in the no arbitrage models should be estimated from the nearest price data and, if once estimated, should not be used for long time after the estimation.
