Binomial Approximations for Barrier Options of Israeli Style

DOI10.1007/978-0-8176-8089-3_22MaRDI QIDQ5198539zbMATH OpenOpenAlexFDO

Authors Yan Dolinsky, Yuri Kifer

Publication date 8 August 2011

Published in Annals of the International Society of Dynamic Games (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0907.4136

zbMATH Keywords

American optionBlack-Scholes market modelbinomial market modelgame (Israeli) barrier option

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Abstract: We show that prices and shortfall risks of game (Israeli) barrier options in a sequence of binomial approximations of the Black--Scholes (BS) market converge to the corresponding quantities for similar game barrier options in the BS market with path dependent payoffs and the speed of convergence is estimated, as well. The results are new also for usual American style options and they are interesting from the computational point of view, as well, since in binomial markets these quantities can be obtained via dynamical programming algorithms. The paper continues the study of [11]and [7] but requires substantial additional arguments in view of pecularities of barrier options which, in particular, destroy the regularity of payoffs needed in the above papers.

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Cited in

(8)

• Limit theorems for partial hedging under transaction costs
• Binomial approximation of Brownian motion and its maximum
• Shortfall risk approximations for American options in the multidimensional Black-Scholes model
• Error estimates for binomial approximations of game options
• Dynkin's games and Israeli options
• On the rate of convergence of barrier option prices in binomial market to those in continuous time market
• Applications of weak convergence for hedging of game options
• Recombining tree approximations for optimal stopping for diffusions

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