multi-period btm dr. dai min. outline: multi-period btm –vanilla options: european and american...
TRANSCRIPT
Multi-period BTM
Dr. DAI Min
Outline:
• Multi-period BTM – Vanilla options: European and American– Barrier options– Strongly-path dependent options: Asian, lookback
• Single-state variable BTM for some strongly-path dependent options
• Forward shooting grid method
Two-period BTM for vanilla options
• Single-period BTM
• A local algorithm
• Two-period BTM– Assumption: two-period tree
Multi-period BTM for vanilla options
S0
S0u
S0d S0 S0
S0u2
S0d2
S0u2
S0u3 S0u4
S0d2
S0u
S0d
S0d4
S0d3
A concise expression of BTM
With continuous dividend yield q
Multi-period BTM for American options
• At any nodes of the tree, check if early exercise is optimal.
Barrier options
• Barrier options are triggered by the action of the underlying hitting a prescribed value at some time before expiry.
• Consider an up-out call: if the underlying price remains below the barrier level until maturity, the contract has a usual call payoff at expiry (red line). However, if the underlying reaches the level before expiry, then the option becomes worthless because it has ``knocked out'‘ (blue line).
Multi-period BTM for barrier options
• Barrier options are weakly path-dependent
Strongly path-dependent options (I)
• Strong path-dependent options: – Asian options– Lookback options
• Type of payoffs:– Fixed strike
– Floating strike
Strongly path-dependent options (II)
• Type of Asian payoffs– Arithmetic average
– Geometric average
Strongly path-dependent options (III)
• Type of lookback payoffs– Maximum
– Minimum
BTM for Asian arithmetic options (I)
BTM for Asian arithmetic options (II)
• A concise expression
BTM for lookback maximum
Single-state variable BTM for strongly path-dependent options (I)
Single-state variable BTM for strongly path-dependent options (II)
Single-state variable BTM for floating strike lookback put
A single-state variable tree:
Single-state variable BTM for floating strike Asian arithmetic
• The single-state variable tree does not recombine!• The amount of computation grows exponentially with the number of time steps.
Single-state variable BTM for American-style floating strike path-dependent options
Single-state variable BTM for fixed strike path-dependent options
• For European case, a single-state variable BTM is available by a different transformation (Roger and Shi (1995));
• For American case, not available.
Forward shooting grid method (FSGM)
• Drawback of BTM– For some path-dependent options, the number of tree nodes
may grow exponentially with the number of time steps
• FSGM– A local binomial model– Implementation is confined to a lattice, instead of a tree.– The number of nodes of the lattice does not grow exponentially.
• Single-state variable case• General case• Interpolation is needed in some scenarios.
Single-state variable FSGM for floating strike Asian arithmetic options
Two-state variable FSGM for arithmetic Asian options (I)
Two-state variable FSGM for arithmetic Asian options (II)
Two-state variable FSGM for lookback options• A similar procedure;• No interpolation is required.