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Efficient Lattice Method for Valuing of Options with Barrier in a Regime Switching Model

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  • Youngchul Han
  • Geonwoo Kim

Abstract

We propose an efficient lattice method for valuation of options with barrier in a regime switching model. Specifically, we extend the trinomial tree method of Yuen and Yang (2010) by calculating the local average of prices near a node of the lattice. The proposed method reduces oscillations of the lattice method for pricing barrier options and improves the convergence speed. Finally, computational results for the valuation of options with barrier show that the proposed method with interpolation is more efficient than the other tree methods.

Suggested Citation

  • Youngchul Han & Geonwoo Kim, 2016. "Efficient Lattice Method for Valuing of Options with Barrier in a Regime Switching Model," Discrete Dynamics in Nature and Society, Hindawi, vol. 2016, pages 1-14, October.
    • Handle: RePEc:hin:jnddns:2474305
    DOI: 10.1155/2016/2474305
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    References listed on IDEAS

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    Cited by:

    1. Chinonso Nwankwo & Weizhong Dai & Ruihua Liu, 2019. "Compact Finite Difference Scheme with Hermite Interpolation for Pricing American Put Options Based on Regime Switching Model," Papers 1908.04900, arXiv.org, revised Jun 2020.
    2. Zhang, Xiaoyuan & Zhang, Tianqi, 2023. "On pricing double-barrier options with Markov regime switching," Finance Research Letters, Elsevier, vol. 51(C).

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