Pricing cliquet options by tree methods

Pricing cliquet options by tree methods

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Article ID: iaor20113399
Volume: 8
Issue: 1
Start Page Number: 125
End Page Number: 135
Publication Date: Apr 2011
Journal: Computational Management Science
Authors: ,
Keywords: option pricing, Black-Scholes
Abstract:

This paper focuses on the problem of pricing the cliquet options which provide a guaranteed minimum annual return. The tree method which we propose simplifies the standard binomial Cox–Ross–Rubinstein approach which, in this context, is problematic from a computational point of view. Our technique provides very efficient and reliable evaluations in a Black‐Scholes framework with piecewise constant interest rates and volatilities.

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