Pricing Discrete Barrier and Hindsight Options with the Tridiagonal Probability Algorithm
Wai Man Tse, Leong Kwan Li, Kai Wang Ng
Management Science · 2001 · Volume 47 · Issue 3
DOI: 10.1287/mnsc.47.3.383.9775
Abstract
This paper develops an algorithm to calculate the Brownian multivariate normal probability subject to any preset error tolerance criteria. The algorithm is founded upon the computational simplicity of the tridiagonal structure of the inverse of the Brownian correlation matrix. Compared with existing pricing technologies without the “barrier too close” problem, our calculation method can produce a more accurate and efficient analytic evaluation of barrier options monitored at discrete instants with well- or ill-behaved barrier levels, or discrete hindsight options, for a reasonably large number of monitorings.
Keywords
Brownian Motion, Multivariate Normal Probability Evaluation Technique, Discrete Barrier Options, Discrete Lookback Options
Enable JavaScript for citation tools and additional paper interactions.