TY - JOUR
T1 - A Frequency Distribution Approach to Valuing Maximum Options
JF - The Journal of Derivatives
SP - 52
LP - 62
DO - 10.3905/jod.2001.319157
VL - 8
IS - 3
AU - Neave, Edwin H.
AU - Slavinsky, Serge
Y1 - 2001/02/28
UR - http://jod.pm-research.com/content/8/3/52.abstract
N2 - “Pricing path-dependent options presents significant challenges, especially when they also involve American exercise. Taking account of every possible path for the price of the underlying over time and aggregating the payoffs can lead to an enormous computational burden. In this article, Neave and Slavinsky present a technique for greatly increasing efficiency in a lattice implementation, using as an example, an option on the maximum asset price attained over the option&'s lifetime. Since the total number of possible payoffs is much smaller than the number of distinct paths through the lattice, it is much more efficient to bundle equal value paths together first, and apply the total probability to the common payoff for that bundle. As a bonus, the authors provide a computer code to perform the calculations.”
ER -