A Linear Time Algorithm for Pricing European Sequential Barrier Options

Gao, P. and van der Meyden, R.

    Financial derivatives are contracts concerning rights and obligations to engage in future transactions on some underlying financial instrument. A major concern in financial markets is to compute an expected value of such contracts as a basis for trading decisions. The Cox, Ross and Rubinstein (CRR) binomial tree model is a popular discrete approach to such computations, which requires time quadratic in the number of discrete temporal steps to contract termination. Lyuu has shown that barrier options can be valued with respect to the CRR model in linear time, using a combinatorial method. The paper develops a generalization of Lyuu's result, showing that a class of more complex options comprised of a sequence of barriers can be valued in linear time.
Cite as: Gao, P. and van der Meyden, R. (2007). A Linear Time Algorithm for Pricing European Sequential Barrier Options. In Proc. Thirteenth Computing: The Australasian Theory Symposium (CATS2007), Ballarat, Australia. CRPIT, 65. Gudmundsson, J. and Jay, B., Eds. ACS. 55-62.
pdf (from crpit.com) pdf (local if available) BibTeX EndNote GS