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Efficient tree methods for pricing digital barrier options

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  • Elisa Appolloni
  • Andrea Ligori

Abstract

We propose an efficient lattice procedure which permits to obtain European and American option prices under the Black and Scholes model for digital options with barrier features. Numerical results show the accuracy of the proposed method.

Suggested Citation

  • Elisa Appolloni & Andrea Ligori, 2014. "Efficient tree methods for pricing digital barrier options," Papers 1401.2900, arXiv.org, revised Jan 2014.
  • Handle: RePEc:arx:papers:1401.2900
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    File URL: http://arxiv.org/pdf/1401.2900
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
    2. Francine Diener & MARC Diener, 2004. "Asymptotics of the price oscillations of a European call option in a tree model," Mathematical Finance, Wiley Blackwell, vol. 14(2), pages 271-293.
    3. K. Sandmann & Reimer, M., 1995. "A Discrete Time Approach for European and American Barrier Options," Discussion Paper Serie B 272, University of Bonn, Germany.
    4. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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