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.
Original language | English |
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Pages (from-to) | 542-554 |
Number of pages | 13 |
Journal | Journal of Economic Dynamics and Control |
Volume | 34 |
Issue number | 3 |
DOIs | |
Publication status | Published - Mar 2010 |
Keywords
- Barrier option
- Extrapolation
- Forward shooting grid method
- Lattice algorithm
- Moving average
ASJC Scopus subject areas
- Economics and Econometrics
- Control and Optimization
- Applied Mathematics