Binomial valuation of lookback options

✍ Scribed by Simon Babbs

• Publisher: Elsevier Science
• Year: 2000
• Tongue: English
• Weight: 258 KB
• Volume: 24
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(99)00085-8

✦ Synopsis

After the original version of this paper, the author became aware that Reiner (1991a, b) had also suggested that working in units of the underlying security price could reduce the problem of valuing lookback options to one involving a single stochastic variable, which might then be approximated by a binomial scheme.

Reiner's papers do not encompass the case where the current gap between the underlying security price and its extremum does not correspond to a whole number of space steps. It also allows the possibility of that gap being zero at both the beginning and the end of a time step. It thus resembles a scheme devised by the present author in the late 1980s, and which appeared to give inferior convergence properties to the scheme reported here.