Convergence of European Lookback Options with Floating Strike in the Binomial Model
AbstractIn this article we study the convergence of a European lookback option with floating strike evaluated with the binomial model of Cox-Ross-Rubinstein to its evaluation with the Black-Scholes model. We do the same for its delta. We confirm that these convergences are of order 1/Sqrt(n). For this, we use the binomial model of Cheuk-Vorst which allows us to write the price of the option using a double sum. Based on an improvement of a lemma of Lin-Palmer, we are able to give the precise value of the term in 1/Sqrt(n) in the expansion of the error; we also obtain the value of the term in 1/n if the risk free interest rate is non zero. This modelisation will also allow us to determine the first term in the expansion of the delta.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1302.2312.
Date of creation: Feb 2013
Date of revision: Oct 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-02 (All new papers)
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