Please use this identifier to cite or link to this item: http://hdl.handle.net/1783.1/194

Pricing algorithms for options with exotic path dependence

Authors Kwok, Yue Kuen
Lau, Ka Wo
Issue Date 2001
Source Journal of Derivatives, 9, (1), 2001 Fall, p.28-38
Summary Pricing algorithms for options with exotic path-dependence using the forward shooting grid approach are characterized by the augmentation of an auxiliary state vector at each grid node on a lattice tree that simulates the discrete asset price process. The state vector is used to capture the specific path-dependent feature of the option contract. We demonstrate the versatility of the forward shooting grid algorithms by generalizing the approach to price various types of Parisian options, options with reset features, and alpha quantile options. The convergence behaviors of the numerical results obtained by the forward shooting grid algorithms are also examined. The advantage of the forward shooting grid approach over the finite-difference approach becomes more apparent when the governing differential equation for the option value cannot be expressed in a simple form.
Subjects
ISSN 1074-1240
Language English
Format Article
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