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A simple and efficient numerical method for pricing discretely monitored early-exercise options

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  • Huang, Min
  • Luo, Guo

Abstract

We present a simple, fast, and accurate method for pricing a variety of discretely monitored options in the Black-Scholes framework, including autocallable structured products, single and double barrier options, and Bermudan options. The method is based on a quadrature technique, and it employs only elementary calculations and a fixed one-dimensional uniform grid. The convergence rate is O(1/N4) and the complexity is O(MNlogN), where N is the number of grid points and M is the number of observation dates. Besides Black-Scholes, our method is also applicable to more general frameworks such as Merton’s jump diffusion model.

Suggested Citation

  • Huang, Min & Luo, Guo, 2022. "A simple and efficient numerical method for pricing discretely monitored early-exercise options," Applied Mathematics and Computation, Elsevier, vol. 422(C).
    • Handle: RePEc:eee:apmaco:v:422:y:2022:i:c:s0096300322000716
    DOI: 10.1016/j.amc.2022.126985
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    References listed on IDEAS

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