PRICING AND HEDGING AMERICAN BARRIER OPTIONS BY A MODIFIED BINOMIAL METHOD

Marcellino Gaudenzi () and Maria Antonietta Lepellere ()
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Marcellino Gaudenzi: Dipartimento di Finanza dell'Impresa e dei Mercati Finanziari, University of Udine, Via Tomadini 30, 33100 Udine, Italy
Maria Antonietta Lepellere: Dipartimento di Ingegneria Civile, University of Udine, Via delle Scienze 208, 33100 Udine, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 04, 533-553

Abstract: The aim of this work is to present a modification of the standard binomial method which allows to price American barrier options improving the efficiency of the trinomial methods. Our approach is based on a suitable interpolation of binomial values and allows to price and hedge such options also in the critical case of near barriers. All the different types of single barrier options are considered, in the case of knock-in barriers a new implementation of the binomial method is provided.

Keywords: American barrier options; lattice methods; interpolation (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024906003664

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