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Flexible-forward pricing through Leisen–Reimer trees: Implementation and performance comparison with traditional Markov chains

Author

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  • Pier Giuseppe Giribone

    (CARIGE Bank Group, 15 Cassa di Risparmio, 16123 Genoa, Italy)

  • Simone Ligato

    (CARIGE Bank Group, 15 Cassa di Risparmio, 16123 Genoa, Italy)

Abstract

This article aims to estimate the fair-value of flexi-forwards, popular financial instruments on currencies, through Leisen–Reimer trees. The first part of paper deals with Markov chains suitable for pricing American options: Cox–Ross–Rubinstein, Jarrow–Rudd, Tian, Leisen–Reimer Trees. The correctness of the implementation in Matlab has been tested by comparing their prices with those obtained through approximated closed-formulas. The second part highlights the better performance of Leisen–Reimer trees in terms of convergence speed and sensitivity. Finally, flexi-forward contracts have been priced by using the numerical methodologies which have outperformed in the previous parts.

Suggested Citation

  • Pier Giuseppe Giribone & Simone Ligato, 2016. "Flexible-forward pricing through Leisen–Reimer trees: Implementation and performance comparison with traditional Markov chains," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-21, June.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:02:n:s2424786316500109
    DOI: 10.1142/S2424786316500109
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    References listed on IDEAS

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    Cited by:

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