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A lattice algorithm for pricing moving average barrier options

Author

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  • Dai, Min
  • Li, Peifan
  • Zhang, Jin E.

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.

Suggested Citation

  • Dai, Min & Li, Peifan & Zhang, Jin E., 2010. "A lattice algorithm for pricing moving average barrier options," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 542-554, March.
    • Handle: RePEc:eee:dyncon:v:34:y:2010:i:3:p:542-554
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    References listed on IDEAS

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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. Wei Xu & Zhiwu Hong & Chenxiang Qin, 2013. "A new sampling strategy willow tree method with application to path-dependent option pricing," Quantitative Finance, Taylor & Francis Journals, vol. 13(6), pages 861-872, May.
    3. 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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