Efficient Lattice Method for Valuing of Options with Barrier in a Regime Switching Model. (3rd October 2016)

• Record Type: Journal Article
• Authors: Han, Youngchul; Kim, Geonwoo
• Other Names: Villatoro Francisco R. Academic Editor.
• Is Part Of: Discrete dynamics in nature and society. Volume 2016(2016)
• Publication Date: 2016-10-03
• Subjects: System analysis -- Periodicals; Dynamics -- Periodicals; Chaotic behavior in systems -- Periodicals; Differentiable dynamical systems -- Periodicals; 003.05
• DOI: 10.1155/2016/2474305
• Languages: English
• ISSNs: 1026-0226

Abstract

Abstract : We propose an efficient lattice method for valuation of options with barrier in a regime switching model. Specifically, we extend the trinomial tree method of Yuen and Yang (2010) by calculating the local average of prices near a node of the lattice. The proposed method reduces oscillations of the lattice method for pricing barrier options and improves the convergence speed. Finally, computational results for the valuation of options with barrier show that the proposed method with interpolation is more efficient than the other tree methods.