Applications of Lattice Methods

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Presentation transcript:

Applications of Lattice Methods Dr. DAI Min

Lookback options and Neumann boundary condition

Single-state BTM for lookback options

Understanding BTM: explicit difference

Explicit difference: Neumann boundary condition

An improved finite difference

Modified BTM

Numerical results

Lattice methods for American options BTM Explicit difference for transformed equation

Explicit difference for American options

Implicit schemes for American options

Solution region and boundary conditions One should exercise the American put when the stock price is low enough When the stock price is high enough, the option value is approximately zero.

Implicit treatment of the constraint

Implicit treatment of the constraint: Projected SOR method

Penalty method

Financial interpretation of penalty approximation

Fully implicit scheme for penalty approximation Difference scheme Linearization of penalty term

Options on two assets

Pricing model of options on two assets (1)

Pricing model of options on two assets (2)

Exchange options

Finite difference schemes for options on two assets

Boundary conditions

Discretization of the cross derivative