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2006•International Journal of Theoretical and Applied FinanceRequires access

PRICING AND HEDGING AMERICAN BARRIER OPTIONS BY A MODIFIED BINOMIAL METHOD

Marcellino Gaudenzi, Maria Antonietta Lepellere

Open publisher page 9 citations

Abstract

The aim of this work is to present a modification of the standard binomial method which allows to price American barrier options improving the efficiency of the trinomial methods. Our approach is based on a suitable interpolation of binomial values and allows to price and hedge such options also in the critical case of near barriers. All the different types of single barrier options are considered, in the case of knock-in barriers a new implementation of the binomial method is provided.

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What this paper is about

The aim of this work is to present a modification of the standard binomial method which allows to price American barrier options improving the efficiency of the trinomial methods. Our approach is based on a suitable interpolation of binomial values and allows to price and hedge such options also in the critical case of near barriers. All the different types of single barrier options are considered, in the case of knock-in barriers a new implementation of the binomial method is provided.

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OpenAlex reports 9 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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Available abstract

The aim of this work is to present a modification of the standard binomial method which allows to price American barrier options improving the efficiency of the trinomial methods. Our approach is based on a suitable interpolation of binomial values and allows to price and hedge such options also in the critical case of near barriers. All the different types of single barrier options are considered, in the case of knock-in barriers a new implementation of the binomial method is provided.

Key concepts: Trinomial, Trinomial tree, Binomial options pricing model, Binomial (polynomial), Barrier option, Hedge, Econometrics, Exotic option

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