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Pricing And Hedging American Barrier Options By A Modified Binomial Method

Author

Listed:
  • MARCELLINO GAUDENZI

    (Dipartimento di Finanza dell'Impresa e dei Mercati Finanziari, University of Udine, Via Tomadini 30, 33100 Udine, Italy)

  • MARIA ANTONIETTA LEPELLERE

    (Dipartimento di Ingegneria Civile, University of Udine, Via delle Scienze 208, 33100 Udine, Italy)

Abstract

The aim of this work is to present a modification of the standard binomial method which allows to price American barrier options improving the efficiency of the trinomial methods. Our approach is based on a suitable interpolation of binomial values and allows to price and hedge such options also in the critical case of near barriers. All the different types of single barrier options are considered, in the case of knock-in barriers a new implementation of the binomial method is provided.

Suggested Citation

  • Marcellino Gaudenzi & Maria Antonietta Lepellere, 2006. "Pricing And Hedging American Barrier Options By A Modified Binomial Method," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 533-553.
    • Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:04:n:s0219024906003664
    DOI: 10.1142/S0219024906003664
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    Citations

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    Cited by:

    1. Lihua Zhang & Weiguo Zhang & Weijun Xu & Xiang Shi, 2014. "A Modified Least-Squares Simulation Approach to Value American Barrier Options," Computational Economics, Springer;Society for Computational Economics, vol. 44(4), pages 489-506, December.
    2. Marcellino Gaudenzi & Antonino Zanette, 2009. "Pricing American barrier options with discrete dividends by binomial trees," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 32(2), pages 129-148, November.

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