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Connecting discrete and continuous path-dependent options

Listed author(s):
  • Paul Glasserman

    (Graduate School of Business, Columbia University, New York, NY 10027, USA)

  • S.G. Kou


    (Department of Statistics, University of Michigan, Ann Arbor, MI 48109-1027, USA)

  • Mark Broadie

    (Graduate School of Business, Columbia University, New York, NY 10027, USA)

Registered author(s):

    This paper develops methods for relating the prices of discrete- and continuous-time versions of path-dependent options sensitive to extremal values of the underlying asset, including lookback, barrier, and hindsight options. The relationships take the form of correction terms that can be interpreted as shifting a barrier, a strike, or an extremal price. These correction terms enable us to use closed-form solutions for continuous option prices to approximate their discrete counterparts. We also develop discrete-time discrete-state lattice methods for determining accurate prices of discrete and continuous path-dependent options. In several cases, the lattice methods use correction terms based on the connection between discrete- and continuous-time prices which dramatically improve convergence to the accurate price.

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    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 3 (1999)
    Issue (Month): 1 ()
    Pages: 55-82

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    Handle: RePEc:spr:finsto:v:3:y:1999:i:1:p:55-82
    Note: received: December 1996; final version received: December 1997
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