The pricing of lookback options and binomial approximation

Karl Grosse-Erdmann and Fabien Heuwelyckx

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Abstract: Refining a discrete model of Cheuk and Vorst we obtain a closed formula for the price of a European lookback option at any time between emission and maturity. We derive an asymptotic expansion of the price as the number of periods tends to infinity, thereby solving a problem posed by Lin and Palmer. We prove, in particular, that the price in the discrete model tends to the price in the continuous Black-Scholes model. Our results are based on an asymptotic expansion of the binomial cumulative distribution function that improves several recent results in the literature.

Date: 2015-02
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1502.02819

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