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Efficient lattice method for valuing of options with barrier in a regime switching model. (English) Zbl 1410.91485

Summary: We propose an efficient lattice method for valuation of options with barrier in a regime switching model. Specifically, we extend the trinomial tree method of F. Lungyuen and H. Yang [J. Comput. Appl. Math. 233, No. 8, 1821–1833 (2010; Zbl 1181.91315)] by calculating the local average of prices near a node of the lattice. The proposed method reduces oscillations of the lattice method for pricing barrier options and improves the convergence speed. Finally, computational results for the valuation of options with barrier show that the proposed method with interpolation is more efficient than the other tree methods.

MSC:

91G60 Numerical methods (including Monte Carlo methods)
91G20 Derivative securities (option pricing, hedging, etc.)
65M99 Numerical methods for partial differential equations, initial value and time-dependent initial-boundary value problems

Citations:

Zbl 1181.91315
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References:

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