Journal of the Korean Society for Industrial and Applied Mathematics

Korean Society for Industrial and Applied Mathematics (한국산업응용수학회)
권호 표지
DOI QR코드

DOI QR Code

AN EFFICIENT BINOMIAL TREE METHOD FOR CLIQUET OPTIONS

  • Received : 2010.12.28
  • Accepted : 2010.05.10
  • Published : 2011.06.25
Download PDF
⟨ Previous Next ⟩

Abstract

This work proposes a binomial method for pricing the cliquet options, which provide a guaranteed minimum annual return. The proposed binomial tree algorithm simplifies the standard binomial approach, which is problematic for cliquet options in the computational point of view, or other recent methods, which may be of intricate algorithm or require pre- or post-processing computations. Our method is simple, efficient and reliable in a Black-Scholes framework with constant interest rates and volatilities.

Keywords

References

  1. E. G. Haug. The complete guide to option pricing formulas. McGraw-Hill, 1997.
  2. M. Rubinstein. Pay now, choose later. Risk, 4:13-13, 1991.
  3. S. Kruse and U. Nogel. On the pricing of forward starting options in heston's model on stochastic volatility. Finance and Stochastics, 9:233-250, 2005. https://doi.org/10.1007/s00780-004-0146-3
  4. P. Wilmott. Cliquet options and volatility models. Wilmott Magazine, December:78-83, 2002.
  5. H. A. Windcliff, P. A. Forsyth, and K. R. Vetzal. Numerical methods and volatility models for valuing cliquet options. Appl. Math. Finance, pages 353-386, 2006.
  6. P. D. Iseger and E. Oldenkamp. Cliquet options: pricing and greeks in deterministic and stochastic volatility models. Technical report, 2005.
  7. J. C. Hull and A. White. Efficient procedures for valuing european and american path-dependent options. Journal of Derivatives, 1:21-31, 1993. https://doi.org/10.3905/jod.1993.407869
  8. M. Gaudenzi and A. Zanette. Pricing cliquet option by tree methods. Computational Management Science, pages 1-11, 2009.
  9. J. Cox, S. Ross, and M. Rubinstein. Option pricing: A simplified approach. Journal of Financial Economics, 7:229-263, 1979. https://doi.org/10.1016/0304-405X(79)90015-1
  10. Y. K. Kwok. Mathematical models of financial derivatives. Springer-Verlag, Singapore, 1998.
  11. Y. D. Lyuu. Financial Engineering and Computation. Cambridge, 2002.
  12. M. Kjaer. On the pricing of cliquet options with global floor and cap. PhD thesis, Goteborg University, 2004.