Flexible-forward pricing through Leisen–Reimer trees: Implementation and performance comparison with traditional Markov chains

Pier Giuseppe Giribone and Simone Ligato ()
Additional contact information
Pier Giuseppe Giribone: CARIGE Bank Group, 15 Cassa di Risparmio, 16123 Genoa, Italy
Simone Ligato: CARIGE Bank Group, 15 Cassa di Risparmio, 16123 Genoa, Italy

International Journal of Financial Engineering (IJFE), 2016, vol. 03, issue 02, 1-21

Abstract: This article aims to estimate the fair-value of flexi-forwards, popular financial instruments on currencies, through Leisen–Reimer trees. The first part of paper deals with Markov chains suitable for pricing American options: Cox–Ross–Rubinstein, Jarrow–Rudd, Tian, Leisen–Reimer Trees. The correctness of the implementation in Matlab has been tested by comparing their prices with those obtained through approximated closed-formulas. The second part highlights the better performance of Leisen–Reimer trees in terms of convergence speed and sensitivity. Finally, flexi-forward contracts have been priced by using the numerical methodologies which have outperformed in the previous parts.

Keywords: Alternative stochastic trees; Leisen–Reimer Markov chains; flexible-forward pricing; numerical schemes for American option valuation; numerical techniques for American option Greeks (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2424786316500109
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijfexx:v:03:y:2016:i:02:n:s2424786316500109

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2424786316500109

Access Statistics for this article

International Journal of Financial Engineering (IJFE) is currently edited by George Yuan

More articles in International Journal of Financial Engineering (IJFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().