Convergence of numerical methods for valuing path-dependent options using interpolation

P. Forsyth (), K. Vetzal () and R. Zvan ()

Review of Derivatives Research, 2002, vol. 5, issue 3, 273-314

Abstract: One method for valuing path-dependent options is the augmented state space approach described in Hull and White (1993) and Barraquand and Pudet (1996), among others. In certain cases, interpolation is required because the number of possible values of the additional state variable grows exponentially. We provide a detailed analysis of the convergence of these algorithms. We show that it is possible for the algorithm to be non-convergent, or to converge to an incorrect answer, if the interpolation scheme is selected in appropriately. We concentrate on Asian options, due to their popularity and because of some errors in the previous literature. Copyright Kluwer Academic Publishers 2002

Keywords: Convergance; forward shooting grid; interpolation; option pricing; path-dependence (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1023/A:1020823700228

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