Pricing maximum-minimum bidirectional options in trinomial CEV model

Bin Peng () and Fei Peng ()
Additional contact information
Bin Peng: SEME, Beijing University of Civil Engineering and Architecture, Beijing, P. R. China
Fei Peng: Electrical & Computer Engineering, UBC, Vancouver, Canada

Journal of Economics, Finance and Administrative Science, 2016, vol. 21, issue 41, 50-55

Abstract: Maximum-minimum bidirectional options are a kind of exotic path dependent options. In the constant elasticity of variance (CEV) model, a combining trinomial tree was structured to approximate the nonconstant volatility that is a function of the underlying asset. On this basis, a simple and efficient recursive algorithm was developed to compute the risk-neutral probability of each different node for the underlying asset reaching a maximum or minimum price and the total number of maxima (minima) in the trinomial tree. With help of it, the computational problems can be effectively solved arising from the inherent complexities of different types of maximum-minimum bidirectional options when the underlying asset evolves as the trinomial CEV model. Numerical results demonstrate the validity and the convergence of the approach mentioned above for the different parameter values set in the trinomial CEV model.

Keywords: Trinomial CEV model; Recursive algorithm; Maximum-minimum bidirectional options (search for similar items in EconPapers)
JEL-codes: C14 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3002071 Full text (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:joefas:0099

Access Statistics for this article

Journal of Economics, Finance and Administrative Science is currently edited by Nestor U. Salcedo

More articles in Journal of Economics, Finance and Administrative Science from Universidad ESAN 1652 Alonso de Molina, Santiago de Surco 15023, Lima, Peru. Contact information at EDIRC.
Bibliographic data for series maintained by ESAN Ediciones ().