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Design, implementation and validation of advanced lattice techniques for pricing EAKO — European American Knock-Out option

Author

Listed:
  • Mattia Fabbri

    (Chartered Accountant and Chartered Engineer, Italy)

  • Pier Giuseppe Giribone

    (#x2020;Department of Economics, University of Genoa, 16126 Genova, Italy‡CARIGE Bank, Financial Engineering, 16123 Genova, Italy)

Abstract

The paper presents a series of advanced lattice methods aimed at evaluating an EAKO European-American Knock-Out contract. The first part of the paper deals with the numerical methods implemented for pricing: Binomial and Trinomial Stochastic trees, Adaptive Mesh Model, Pentanomial and Heptanomial lattice. In the second part, specific tests are designed to validate the code written in Matlab language. The study concludes by applying the most performing model to a real market case.

Suggested Citation

  • Mattia Fabbri & Pier Giuseppe Giribone, 2019. "Design, implementation and validation of advanced lattice techniques for pricing EAKO — European American Knock-Out option," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-26, December.
    • Handle: RePEc:wsi:ijfexx:v:06:y:2019:i:04:n:s2424786319500324
    DOI: 10.1142/S2424786319500324
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