AMERICAN OPTION PRICING WITH DIAGONAL METHOD
American option is one of the vanilla option mostly used in the capital market. American option on its implementation can be done anytime during the term of the option until the end of the maturity of the options. The Calculation of American option can be accomplished by using the binomial and trino...
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| Format: | Final Project |
| Language: | Indonesia |
| Online Access: | https://digilib.itb.ac.id/gdl/view/21123 |
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| Institution: | Institut Teknologi Bandung |
| Language: | Indonesia |
| Summary: | American option is one of the vanilla option mostly used in the capital market. American option on its implementation can be done anytime during the term of the option until the end of the maturity of the options. The Calculation of American option can be accomplished by using the binomial and trinomial method. Both method of calculation is done by backward induction, every point on the binomial and trinomial trees must be calculated from back to front. The Computation process of binomial and trinomial methods is inefficient because they must be calculated on every point on the binomial and trinomial trees, whereas there are many option with zero value and should not be taken into account in the computing process. Calculations on the binomial and trinomial methods can be accelerated by using diagonal method. (Curran, 1995). When the binomial and trinomial method is done by vertically backward induction, the calculation of the diagonal method is done by diagonally backward induction. On the diagonal method, not all the points will be counted, there are two important rules in this method that must be obeyed. <br />
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In this final project, American option value will be determined by using diagonal method. Then the results will be compared with the binomial and trinomial method. <br />
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