A simple and efficient numerical method for pricing discretely monitored early-exercise options

Min Huang and Guo Luo

Applied Mathematics and Computation, 2022, vol. 422, issue C

Abstract: We present a simple, fast, and accurate method for pricing a variety of discretely monitored options in the Black-Scholes framework, including autocallable structured products, single and double barrier options, and Bermudan options. The method is based on a quadrature technique, and it employs only elementary calculations and a fixed one-dimensional uniform grid. The convergence rate is O(1/N4) and the complexity is O(MNlogN), where N is the number of grid points and M is the number of observation dates. Besides Black-Scholes, our method is also applicable to more general frameworks such as Merton’s jump diffusion model.

Keywords: Discrete option pricing; Quadrature method; Autocallable structured product; Single and double barrier option; Bermudan option (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:422:y:2022:i:c:s0096300322000716

DOI: 10.1016/j.amc.2022.126985

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