Article ID Journal Published Year Pages File Type
4639254 Journal of Computational and Applied Mathematics 2013 11 Pages PDF
Abstract

In this work we develop an efficient lattice approach for option pricing with two underlying assets whose prices are governed by regime-switching models. Jump amplitudes are specified in a way such that the lattice achieves complete node recombination along each asset variable and grows quadratically as the number of time steps increases. Jump probabilities are obtained by solving a related quadratic programming problem. The weak convergence of the discrete lattice approximations to the continuous-time regime-switching diffusion processes is established. The lattice is employed to price both European and American options written on the maximum and minimum of two assets in different regimes. Numerical results are provided and compared for the European options with a Monte-Carlo simulation approach.

Related Topics
Physical Sciences and Engineering Mathematics Applied Mathematics
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