Title

Multinomial Approximating Models for Options

DOI

10.6291/AIAPM.2006.02.09

Authors

Hemantha S. B. Herath;Pranesh Kumar

Key Words

Real Options ; Contingent Claims ; Option Pricing ; Multinomial Lattice ; Asset Correlations

PublicationName

Advances in Investment Analysis and Portfolio Management

Volume or Term/Year and Month of Publication

2期(2006 / 11 / 01)

Page #

199 - 226

Content Language

英文

English Abstract

Many problems in valuing complex derivatives are solved by using discrete multinomial approximations. In this article, we suggest two modifications for Kamrad and Ritchken (1991) multinomial approximating model. First, we propose the inclusion of an omitted second order term to reduce errors. Second, we ensure non-negative probabilities by bounding the stretch parameter, which parameterizes the size of the up-and down-jumps in the lattice. From a standpoint of assessing the computational effort, we derive mathematical expressions to determine the number of nodes generated by the approximation process for a k asset model. Numerical examples are presented to illustrate gain in accuracy of the proposed model on pricing options and computational efficiency.

Topic Category 社會科學 > 經濟學
社會科學 > 財金及會計學
Reference
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Times Cited
  1. 陳慶全(2006)。改良型環狀類神經網路架構之實現與應用。臺北科技大學自動化科技研究所學位論文。2006。1-96。