Convergence Analysis of Binomial Tree Method for American-Type Path-Dependent Options

FREE BOUNDARY PROBLEMS: THEORY AND APPLICATIONS, pp. 153-166, Chiba, 1999

14 Pages Posted: 4 May 2006 Last revised: 9 Feb 2009

See all articles by Min Dai

Min Dai

National University of Singapore (NUS) - Department of Mathematics

Lishang Jiang

Tongji University - Institute of Mathematics

Date Written: December 1, 2002

Abstract

The pricing models of American-type path-dependent options are of degenerate parabolic obstacle problems. The binomial tree method is the most popular approach to pricing options. For some special cases, this method is modified in order to make it feasible. The main purpose of this paper is, using numerical analysis and the notion of viscosity solutions, to show the uniform convergence of the binomial tree method and the modified binomial tree method for American-type path-dependent options.

Numerical experiments are given to demonstrate our conclusion.

Keywords: Path-dependent options, binomial tree method, forward shooting grid method, convergence analysis

JEL Classification: G13

Suggested Citation

Dai, Min and Jiang, Lishang, Convergence Analysis of Binomial Tree Method for American-Type Path-Dependent Options (December 1, 2002). FREE BOUNDARY PROBLEMS: THEORY AND APPLICATIONS, pp. 153-166, Chiba, 1999. Available at SSRN: https://ssrn.com/abstract=900407

Min Dai (Contact Author)

National University of Singapore (NUS) - Department of Mathematics ( email )

Singapore

Lishang Jiang

Tongji University - Institute of Mathematics ( email )

1239 Siping Road
Shanghai, 200092
China

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