Convergence rate of the binomial tree scheme for continuously paying options
Continuously Paying Options (CPOs) form a very natural class of derivatives for hedging risks coming from adverse movements of a continuously traded asset. We study the rate of convergence of CPOs evaluated under the binomial tree scheme when the payout function is piecewise C(2) subject to some bou...
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| Format: | article |
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2012
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| Online Access: | http://hdl.handle.net/11073/16669 |
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| Summary: | Continuously Paying Options (CPOs) form a very natural class of derivatives for hedging risks coming from adverse movements of a continuously traded asset. We study the rate of convergence of CPOs evaluated under the binomial tree scheme when the payout function is piecewise C(2) subject to some boundedness conditions. We show that if is continuous, the rate of convergence is ¯¹ while it is n¯¹/² if is discontinuous. |
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