BINO-TRINOMIAL METHOD FOR PRICING BARRIER OPTION

• Main Author: DWI ISMANTO (NIM: 10114056), RIDO
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/30454
• Institution: Institut Teknologi Bandung

The barrier option is a widely traded option in the stock market. Various types of barriers make the option price calculation is not simple. There are various methods to determine the price of the option. Starting from analytical methods to numerical methods. By using analytical methods, of course the results obtained very good, but only a small portion of barrier options that can be calculated by the method. The numerical method is the next option. There are various types of numerical methods ranging from finite different, Monte-Carlo to lattice. Finite Differences require Partial Differential Equations (PDE) of the options to be counted and not all types of barrier options have it. While Monte-Carlo requires a large enough simulation to produce a fairly accurate calculation. Based on that, the lattice method was chosen. The popular lattice methods include binomial methods and trinomial methods each with its various types, advantages and disadvantages. Binomial methods require calculations that are not too heavy but the lattice is less flexible to overcome various types of barrier. While the trinomial method is slightly more flexible but the calculation is heavier than the binomial method. For that, we will use the Bino-Trinomial-Tree (BTT) lattice method which is a combination of binomial and trinomial methods. The calculation results show that the method can take advantage of binomial and trinomial methods and remove the weakness of both methods. The results of this Under Graduated Thesis also shows that the flexibility of BTT is able to overcome various barrier options such as single barrier, double barrier and moving barrier options.