Computationally simple lattice methods for option

Authors: Massimo Costabile Arturo Leccadito Ivar Massabó

Publish Date: 2009/08/01

Volume: 32, Issue: 2, Pages: 161-181

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Abstract

We propose new latticebased algorithms for option and bond pricing which rely on computationally simple trees ie trees with the number of nodes that grows at most linearly in the number of time intervals Contrary to commonly used methods the target diffusion is approximated directly without having to transform the original process into a constant volatility process The discrete approximating process converges to the target continuous process and the proposed algorithms are shown to be efficient and accurate for pricing purposes

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