Pricing American barrier options with discrete dividends by binomial trees. (English) Zbl 1176.91153
Summary: We are concerned with the problem of pricing plain-vanilla and barrier options with cash dividends in a piecewise lognormal model. In the plain-vanilla case, we offer a method with provides thin upper and lower bounds of the exact binomial price. In the barrier case, we provide an efficient algorithm based on suitable interpolation techniques. As by-product, we provide a new method for pricing American barrier options with continuous dividends.
MSC:
| 91G20 | Derivative securities (option pricing, hedging, etc.) |
| 91G60 | Numerical methods (including Monte Carlo methods) |
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