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A lattice algorithm for pricing moving average barrier options

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Listed author(s):
  • Dai, Min
  • Li, Peifan
  • Zhang, Jin E.
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Abstract

This paper presents a lattice algorithm for pricing both European- and American-style moving average barrier options (MABOs). We develop a finite-dimensional partial differential equation (PDE) model for discretely monitored MABOs and solve it numerically by using a forward shooting grid method. The modeling PDE for continuously monitored MABOs has infinite dimensions and cannot be solved directly by any existing numerical method. We find their approximate values indirectly by using an extrapolation technique with the prices of discretely monitored MABOs. Numerical experiments show that our algorithm is very efficient.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165-1889(09)00196-1
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 3 (March)
Pages: 542-554

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:3:p:542-554
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

Keywords: Barrier option Moving average Lattice algorithm Forward shooting grid method Extrapolation;

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Cited by:

  1. Jun Cheng & Jin Zhang, 2012. "Analytical pricing of American options," Review of Derivatives Research, Springer, vol. 15(2), pages 157-192, July.
  2. Ballestra, Luca Vincenzo & Pacelli, Graziella, 2013. "Pricing European and American options with two stochastic factors: A highly efficient radial basis function approach," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1142-1167.

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