MULTI-ASSET VALUATION OPTION USING LATTICE AND QUADRATURE METHOD

• Main Author: Agustiani, Nur
• Format: Theses
• Language: Indonesia
• Subjects: Matematika
• Online Access: https://digilib.itb.ac.id/gdl/view/34775
• Institution: Institut Teknologi Bandung

Valuation option may depend on more than one asset. Lattice and quadrature methods can be used to calculate the valuation options, either for a single- asset or multi-assets. Both methods have the same working principle, that is to compute all the possible stock price with its payoff at the maturity time, and then work backwards to get the option value when the time, t = 0, event though, on the quadrature method, the option value calculated using numerical integration. Another difference is the possibility of stock price movement in quadrature methods could be more than two or three possibilities, unlike the lattice method which is the stock price movement at one time step only have two (binomial lattice) or three (trinomial lattice) possibilities. In addition, the option value particularly the European options on lattice method depends on the number of time steps and the selection of the stretch parameter, while on quadrature method depends only on the partition of stock prices. The more time steps on lattice method, the result would be more convergent to the exact value, but causes longer computation time, especially for multi-asset. Unlike the lattice method, on quadrature method, if more partitions of stock price, the result would converge even equal to the exact value and it does not affect the computation time. However, for the discrete barrier valuation option, the computing time would be longer with the addition of monitoring, although when using quadrature, the results would be more convergent to its benchmark. However, for the lattice method, number of monitoring does not affect to the computing time. However, on the lattice method, the speed of computing time is not affected by the number of monitoring.