Pricing Discrete Barrier and Hindsight Options with the Tridiagonal Probability Algorithm

Wai Man Tse (), Leong Kwan Li () and Kai Wang Ng ()
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Wai Man Tse: School of Business, The University of Hong Kong, Pokfulam Road, Hong Kong
Leong Kwan Li: Department of Applied Mathematics, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong
Kai Wang Ng: Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong

Management Science, 2001, vol. 47, issue 3, 383-393

Abstract: This paper develops an algorithm to calculate the Brownian multivariate normal probability subject to any preset error tolerance criteria. The algorithm is founded upon the computational simplicity of the tridiagonal structure of the inverse of the Brownian correlation matrix. Compared with existing pricing technologies without the "barrier too close" problem, our calculation method can produce a more accurate and efficient analytic evaluation of barrier options monitored at discrete instants with well- or ill-behaved barrier levels, or discrete hindsight options, for a reasonably large number of monitorings.

Keywords: Brownian Motion; Multivariate Normal Probability Evaluation Technique; Discrete Barrier Options; Discrete Lookback Options (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (3)

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