The pricing of lookback options and binomial approximation

Karl Grosse-Erdmann () and Fabien Heuwelyckx ()
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Karl Grosse-Erdmann: Université de Mons
Fabien Heuwelyckx: Université de Mons

Decisions in Economics and Finance, 2016, vol. 39, issue 1, No 2, 33-67

Abstract: Abstract Refining a discrete model of Cheuk and Vorst, we obtain a closed formula for the price of a European lookback option at any time between emission and maturity. We derive an asymptotic expansion of the price as the number of periods tends to infinity, thereby solving a problem posed by Lin and Palmer. We prove, in particular, that the price in the discrete model tends to the price in the continuous Black–Scholes model. Our results are based on an asymptotic expansion of the binomial cumulative distribution function that improves several recent results in the literature.

Keywords: Lookback option; Cheuk–Vorst model; Pricing; Binomial cumulative distribution function; Asymptotic expansion; 91G20; 34E05; 91G60 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10203-016-0171-7

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