Pricing multiasset time‐varying double‐barrier options with time‐dependent parameters

This paper proposes the first lattice to price multiasset double‐barrier options when barriers, volatilities, correlations, and interest rates are all time varying. The nodes are strategically placed to both match the volatilities and align with the two barriers per asset for fast convergence. The b...

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Bibliographic Details
Published in:The journal of futures markets 2023-03, Vol.43 (3), p.404-434
Main Authors: Lyuu, Yuh‐Dauh, Zhang, Yu‐Quan
Format: Article
Language:English
Subjects:
Assets
barrier option
Barriers
Convergence
double‐barrier option
Interest rates
multiasset option
multivariate lattice
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Summary:This paper proposes the first lattice to price multiasset double‐barrier options when barriers, volatilities, correlations, and interest rates are all time varying. The nodes are strategically placed to both match the volatilities and align with the two barriers per asset for fast convergence. The branching probabilities are provably valid. The size of our lattice is O(nk+1) $O({n}^{k+1})$, where n $n$ is the number of time steps and k $k$ is the number of assets, and is only O(n1+k∕2) $O({n}^{1+k\unicode{x02215}2})$ for continuously monitored double‐barrier knock‐out options.
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.22392