A lattice algorithm for pricing moving average barrier options

Min Dai, Peifan Li and Jin E. Zhang

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 3, 542-554

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.

Keywords: Barrier; option; Moving; average; Lattice; algorithm; Forward; shooting; grid; method; Extrapolation (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:3:p:542-554

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