Adaptive Mesh Modeling and Barrier Option Pricing Under a Jump-Diffusion Process

43 Pages Posted: 28 Feb 2007

See all articles by Jason Fink

Jason Fink

James Madison University - College of Business

Michael Albert

Duke University; James Madison University

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

Fink, Jason and Albert, Michael, Adaptive Mesh Modeling and Barrier Option Pricing Under a Jump-Diffusion Process (February 26, 2007). Available at SSRN: https://ssrn.com/abstract=965564 or http://dx.doi.org/10.2139/ssrn.965564

Jason Fink (Contact Author)

James Madison University - College of Business ( email )

Harrisonburg, VA 22807
United States
540-568-8107 (Phone)

Michael Albert

Duke University ( email )

1 Towerview Dr.
Durham, NC 27708
United States
540 421-7768 (Phone)

James Madison University ( email )

Harrisonburg, VA 22807
United States

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