An efficient, and fast convergent algorithm for barrier options

Tian-Shyr Dai*, Yuh Dauh Lyuu

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contribution

2 Scopus citations

Abstract

A barrier option is an option whose payoff depends on whether the price path of the underlying asset ever reaches certain predetermined price levels called the barriers. A single- (double-) barrier option is a barrier option with one (two, respectively) barrier(s). No simple and exact closed-form pricing formula for double-barrier options has been reported in the literature. This paper proposes a novel tree model that can price both single- and double-barrier options efficiently and accurately. This tree model achieves the high efficiency by combinar torial techniques and numerical accuracy by hitting the barriers exactly. Numerical experiments are given to verify the superiority of our method.

Original languageEnglish
Title of host publicationAlgorithmic Aspects in Information and Management - Third International Conference, AAIM 2007, Proceedings
Pages251-261
Number of pages11
DOIs
StatePublished - 1 Dec 2007
Event3rd International Conference on Algorithmic Aspects in Information and Management, AAIM 2007 - Portland, OR, United States
Duration: 6 Jun 20078 Jun 2007

Publication series

NameLecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics)
Volume4508 LNCS
ISSN (Print)0302-9743
ISSN (Electronic)1611-3349

Conference

Conference3rd International Conference on Algorithmic Aspects in Information and Management, AAIM 2007
CountryUnited States
CityPortland, OR
Period6/06/078/06/07

Keywords

  • Barrier option
  • Combinatorics
  • Option pricing
  • Tree

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