On a recursive algorithm for pricing discrete barrier options

2015 ◽  
Vol 02 (04) ◽  
pp. 1550047
Author(s):  
Dennis G. Llemit

An alternative and simple algorithm for valuating the price of discrete barrier options is presented. This algorithm computes the price just exactly the same as the Cox–Ross–Rubinstein (CRR) model. As opposed to other pricing methodologies, this recursive algorithm utilizes only the terminal nodes of the binomial tree and it captures the intrinsic property, the knock-in or knock-out feature, of barrier options. In this paper, we apply the algorithm to compute the price of an Up and Out Put (UOP) barrier option and compare the results obtained from the CRR model. We then determine the time complexity of the algorithm and show that it is [Formula: see text].

2019 ◽  
Vol 1 ◽  
pp. 1-2
Author(s):  
Guiyun Zhou ◽  
Wenyan Dong ◽  
Hongqiang Wei

<p><strong>Abstract.</strong> Flow accumulation is an essential input for many hydrological and topographic analyses such as stream channel extraction, stream channel ordering and sub-watershed delineation. Flow accumulation matrices can be derived directly from DEMs and general have O(NlogN) time complexity (Arge, 2003; Bai et al., 2015). It is more common to derive the flow accumulation matrix from a flow direction matrix. This study focuses on calculating the flow accumulation matrix from the flow direction matrix that is derived using the single-flow D8 method (Barnes et al., 2014; Garbrecht &amp; Martz, 1997; Nardi et al., 2008; O'Callaghan &amp; Mark, 1984). In this study, we find give an overview of algorithms for flow accumulation calculation that have O(N) time complexity. These algorithms include algorithms are based on the concept of the number of input drainage paths (Wang et al.2011, Jiang et al. 2013), the algorithm based on the basin tree indices (Su et al. 2015), and the recursive algorithm (Choi, 2012; Freeman, 1991).</p><p>We propose a fast and simple algorithm to calculate the flow accumulation matrix. Compared with the existing algorithms that have O(N) time complexity, our algorithm runs faster and generally requires less memory. Our algorithm is also simple to implement. In our algorithm, we define three types of cells within a flow direction matrix: source cells, interior cells and intersection cells. A source cell does not have neighboring cells that drain to it and its NIDP value is zero. An interior cell has only one neighboring cell that drains to it and its NIDP value is one. An intersection cell has more than one neighboring cell that drains to it and its NIDP value is greater than one. The proposed algorithm initializes the flow accumulation matrix with the value of one. Our algorithm first calculates the NIDP matrix from the flow direction matrix. The algorithm then traverses each cell within the flow direction matrix row by row and column by column, similar to the traversal algorithm. When a source cell <i>c</i> is encountered, the algorithm traces all downstream cells of <i>c</i> until it encounters an intersection cell <i>i</i>. During the tracing, the accumulation value of a cell is added to the accumulation value of its immediate downstream cell. An interior cell has only one neighboring cell that drains to it and its final accumulation value is obtained when the tracing is done. The accumulation value of the intersection cell i is updated from this drainage path. However, cell <i>i</i> has other unvisited neighboring cells that drain to it and its final accumulation value cannot be obtained after this round of tracing. The algorithm decreases the NIDP value of <i>i</i> by one. Cell <i>i</i> is visited again when other drainage paths that pass through it are traced. When all of the drainage paths that pass through it are traced, cell <i>i</i> is treated as an interior cell and the final accumulation value of <i>i</i> is obtained correctly and the last tracing process can continue the tracing after cell <i>i</i> is treated as an interior cell. A worked example of the proposed algorithm is shown in Figure 1.</p><p>The five flow accumulation algorithms with O(N) time complexity, including Wang’s algorithm, Jiang’s algorithm, the BTI-based algorithm, the recursive algorithm and our proposed algorithm, are implemented in C++. The 3-m LiDAR-based DEMs of thirty counties in the state of Minnesota, USA, are downloaded from the FTP site operated by the Minnesota Geospatial Information Office. The first 30 counties in Minnesota in alphabetic order are chosen for the experiments to avoid selection bias. We use the algorithm proposed by Wang and Liu (2006) to fill the depressions and derive the flow direction matrices for all tested counties. The running times on the Windows system are listed in Figure 2.The average running times per 100 million cells are 14.42 seconds for Wang’s algorithm, 15.90 seconds for Jiang’salgorithm, 18.95 seconds for the BTI-based algorithm, 10.87 seconds for the recursive algorithm, and 5.26 seconds forour proposed algorithm. Our algorithm runs the fastest for all tested DEM. The speed-up ratios of our proposedalgorithm over the second fastest algorithm is about 51%.</p>


2019 ◽  
Vol 10 (1) ◽  
pp. 83-92
Author(s):  
S Sulastri ◽  
Lienda Novieyanti ◽  
Sukono Sukono

Abstract. This study aims to minimize the violation of the assumptions of determining price options by taking into account the actual market conditions in order to obtain the right price that will provide high profits for investors. The method used to determine the option price in this study is the Kamrad Ritchken trinomial with volatility values that will be modeled first using GARCH. The data used in this study is daily data (5 working days per week) from the closing price of the stock price of PT. Bank Rakyat Indonesia, Tbk (BBRI. Based on the results of the research, the best model is GARCH (1,1). For the call up barrier option, increase the strike price with the initial price and barrier which causes the option price to call up the barrier "in" and "out" decreases, on the contrary to the put barrier option, an increase in strike price with the initial price and a barrier that causes the put barrier option price to both put up-in and put up-out. initial and barrier which still causes the call down barrier option price both in and out decreases, on the contrary in the put down barrier option, increasing strike price with the initial price and barrier which causes the put down barrier option price to increase in and out.Keywords: Barrier Options, Trinomial, Kamrad Ritchken, Volatility, GARCH  Abstrak. Penelitian ini bertujuan untuk meminimalkan pelanggaran asumsi-asumsi penentuan harga opsi dengan memperhatikan kondisi pasar yang sebenarnya sehingga diperoleh harga yang tepat yang akan memberikan keuntungan tinggi bagi investor. Metode yang digunakan untuk menentukan harga opsi dalam penelitian ini adalah trinomial Kamrad Ritchken dengan nilai volatilitas yang akan dimodelkan terlebih dahulu dengan menggunakan GARCH. Data yang digunakan dalam penelitian ini adalah data harian (5 hari kerja per minggu) dari harga penutupan harga saham PT. Bank Rakyat Indonesia, Tbk (BBRI). Berdasarkan hasil penelitian diperoleh model yang paling baik adalah GARCH (1,1). Untuk opsi call up barrier, peningkatan strike price dengan harga awal dan barrier yang tetap menyebabkan harga opsi call up barrier baik "in" maupun "out" menurun, sebaliknya pada opsi put barrier, peningkatan strike price dengan harga awal dan barrier yang tetap menyebabkan harga opsi put barrier baik put up-in maupun put up-out meningkat. Sedangkan untuk opsi call barrier, peningkatan strike price dengan harga awal dan barrier yang tetap menyebabkan harga opsi call down barrier baik in maupun out menurun, sebaliknya pada opsi put down barrier, peningkatan strike price dengan harga awal dan barrier yang tetap menyebabkan harga opsi put down barrier baik in maupun out meningkat.Kata Kunci :  Opsi Barrier, Trinomial, Kamrad Ritchken, Volatilitas, GARCH


1999 ◽  
Vol 02 (01) ◽  
pp. 17-42 ◽  
Author(s):  
RAPHAËL DOUADY

We first recall the well-known expression of the price of barrier options, and compute double barrier options by the mean of the iterated mirror principle. The formula for double barriers provides an intraday volatility estimator from the information of high-low-close prices. Then we give explicit formulas for the probability distribution function and the expectation of the exit time of single and double barrier options. These formulas allow to price time independent and time dependent rebates. They are also helpful to hedge barrier and double barrier options, when taking into account variations of the term structure of interest rates and of volatility. We also compute the price of rebates of double knock-out options that depend on which barrier is hit first, and of the BOOST, an option which pays the time spent in a corridor. All these formulas are either in closed form or double infinite series which converge like e-α n2.


2011 ◽  
Vol 14 (07) ◽  
pp. 1091-1111 ◽  
Author(s):  
PETER CARR

We show that the payoff to barrier options can be replicated when the underlying price process is driven by the difference of two independent Poisson processes. The replicating strategy employs simple semi-static positions in co-terminal standard options. We note that classical dynamic replication using just the underlying asset and a riskless asset is not possible in this context. When the underlying of the barrier option has no carrying cost, we show that the same semi-static trading strategy continues to replicate even when the two jump arrival rates are generalized into positive even functions of distance to the barrier and when the clock speed is randomized into a positive continuous independent process. Since the even function and the positive process need no further specification, our replicating strategies are also semi-robust. Finally, we show that previous results obtained for continuous processes arise as limits of our analysis.


2015 ◽  
Vol 6 (1) ◽  
pp. 35-46 ◽  
Author(s):  
Yong Wang

Traveling salesman problem (TSP) is a classic combinatorial optimization problem. The time complexity of the exact algorithms is generally an exponential function of the scale of TSP. This work gives an approximate algorithm with a four-vertex-three-line inequality for the triangle TSP. The time complexity is O(n2) and it can generate an approximation less than 2 times of the optimal solution. The paper designs a simple algorithm with the inequality. The algorithm is compared with the double-nearest neighbor algorithm. The experimental results illustrate the algorithm find the better approximations than the double-nearest neighbor algorithm for most TSP instances.


Mathematics ◽  
2020 ◽  
Vol 8 (8) ◽  
pp. 1271
Author(s):  
Marianito R. Rodrigo

A barrier option is an exotic path-dependent option contract where the right to buy or sell is activated or extinguished when the underlying asset reaches a certain barrier price during the lifetime of the contract. In this article we use a Mellin transform approach to derive exact pricing formulas for barrier options with general payoffs and exponential barriers on underlying assets that have jump-diffusion dynamics. With the same approach we also price barrier options on underlying futures contracts.


2014 ◽  
Vol 01 (01) ◽  
pp. 1450009 ◽  
Author(s):  
Peter Carr

The modern theory of option pricing rests on Itô calculus, which is a second-order calculus based on the quadratic variation of a stochastic process. One can instead develop a first-order stochastic calculus, which is based on the running minimum of a stochastic process, rather than its quadratic variation. We focus here on the analog of geometric Brownian motion (GBM) in this alternative stochastic calculus. The resulting stochastic process is a positive continuous martingale whose laws are easy to calculate. We show that this analog behaves locally like a GBM whenever its running minimum decreases, but behaves locally like an arithmetic Brownian motion otherwise. We provide closed form valuation formulas for vanilla and barrier options written on this process. We also develop a reflection principle for the process and use it to show how a barrier option on this process can be hedged by a static postion in vanilla options.


2021 ◽  
Vol 41 (1) ◽  
pp. 26-40
Author(s):  
Sadia Anjum Jumana ◽  
ABM Shahadat Hossain

In this work, we discuss some very simple and extremely efficient lattice models, namely, Binomial tree model (BTM) and Trinomial tree model (TTM) for valuing some types of exotic barrier options in details. For both these models, we consider the concept of random walks in the simulation of the path which is followed by the underlying stock price. Our main objective is to estimate the value of barrier options by using BTM and TTM for different time steps and compare these with the exact values obtained by the benchmark Black-Scholes model (BSM). Moreover, we analyze the convergence of these lattice models for these exotic options. All the results have been shown numerically as well as graphically. GANITJ. Bangladesh Math. Soc.41.1 (2021) 26-40


2018 ◽  
Vol 7 (4) ◽  
pp. 357
Author(s):  
NI MADE NITA ASTUTI ◽  
KOMANG DHARMAWAN ◽  
TJOKORDA BAGUS OKA

The barrier option is an option whose payoff depends on whether the underlying asset touches the barrier or not during the lifetime of the option. The determination of the barrier option requires a numerical approach, one of which is the Binomial Tree model. The purpose of this study  is to determine barrier option type down and out call on a static hedging using the Binomial Tree model and compare it with the analytic value. The results show that the increases in strike price would decrease the option value. Moreover, values from 80 periods using the Binomial Tree model for the four strike prices are close to analytic with error less than or equal to 0.00182.


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