Pricing Exotic Options Using Some Lattice Procedures

Authors

  • Sadia Anjum Jumana Department of Applied Mathematics, University of Dhaka, Dhaka-1000, Bangladesh
  • ABM Shahadat Hossain Department of Applied Mathematics, University of Dhaka, Dhaka-1000, Bangladesh

DOI:

https://doi.org/10.3329/ganit.v41i1.55024

Keywords:

Binomial tree model (BTM); Trinomial tree model (TTM); Black-Scholes Model(BSM); Exotic options; Barrier Option.

Abstract

In this work, we discuss some very simple and extremely efficient lattice models, namely, Binomial tree model (BTM) and Trinomial tree model (TTM) for valuing some types of exotic barrier options in details. For both these models, we consider the concept of random walks in the simulation of the path which is followed by the underlying stock price. Our main objective is to estimate the value of barrier options by using BTM and TTM for different time steps and compare these with the exact values obtained by the benchmark Black-Scholes model (BSM). Moreover, we analyze the convergence of these lattice models for these exotic options. All the results have been shown numerically as well as graphically.

GANITJ. Bangladesh Math. Soc.41.1 (2021) 26-40

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Published

2021-10-06

How to Cite

Jumana, S. A. ., & Hossain, A. S. . (2021). Pricing Exotic Options Using Some Lattice Procedures. GANIT: Journal of Bangladesh Mathematical Society, 41(1), 26–40. https://doi.org/10.3329/ganit.v41i1.55024

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