Adaptive Mesh Modeling and Barrier Option Pricing Under a Jump-Diffusion Process
43 Pages Posted: 28 Feb 2007
Date Written: February 26, 2007
Abstract
The computational burden of numerical barrier option pricing solutions is significant, even prohibitive for some parameterizations - especially for more realistic models of underlying asset behavior, such as jump-diffusions. We extend the Hilliard-Schwartz (2005) pricing algorithm in two important ways. We implement the tree as a trinomial, and then demonstrate how an adaptive mesh may fit into the model. Our result is a barrier option pricing method employing fewer computational resources, reducing run times to 1.6% of the original tree or less. This extension allows the pricing of options that were previously computationally infeasible, and is easily extendable to multiple barriers.
Keywords: Derivatives Pricing, Barrier Option, Jump Process, AMM, Adaptive Mesh
JEL Classification: G13, G19
Suggested Citation: Suggested Citation