Pricing European and American Derivatives Under a Jump-Diffusion Process: A Bivariate Tree Approach

50 Pages Posted: 23 Jun 2003

See all articles by Jimmy E. Hilliard

Jimmy E. Hilliard

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Adam Schwartz

Washington and Lee University - Department of Business Administration

Date Written: June 13, 2003

Abstract

We develop a straightforward procedure to price derivatives by a bivariate tree when the underlying process is a jump-diffusion. Probabilities and jump sizes are derived by matching higher order moments or cumulants. Comparisons with other published results are given along with convergence proofs and estimates of the order of convergence. A long term investment project is used to demonstrate the impact of jumps on imbedded options.

Keywords: jump-diffusion, bivariate tree, options

JEL Classification: G13

Suggested Citation

Hilliard, Jimmy E. and Schwartz, Adam, Pricing European and American Derivatives Under a Jump-Diffusion Process: A Bivariate Tree Approach (June 13, 2003). Available at SSRN: https://ssrn.com/abstract=398480 or http://dx.doi.org/10.2139/ssrn.398480

Jimmy E. Hilliard (Contact Author)

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
Baton Rouge, LA 70803-6308
United States
225-578-7676 (Phone)
225-578-6366 (Fax)

Adam Schwartz

Washington and Lee University - Department of Business Administration ( email )

Lexington, VA 24450
United States

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