Cutting edges using domain integration
Zhengyun Hu, Jeroen Kerkhof, Paul McCloud and Jorg Wackertapp present the semi-analytic lattice integrator tree, a domain integrator method for pricing derivatives. This method can eliminate almost all numerical noises in derivatives pricing, and therefore offers significant advantages over conventional trees in accuracy and computational efficiency
The aim of this article is to present an efficient semi-analytic lattice methodology for derivatives pricing, as an alternative to and improvement on standard recombining binomial and trinomial trees. Standard recombining trees are popular methods for pricing derivatives and are particularly convenient for pricing Bermudan and American-style call options using the backward induction algorithm (see, for example, Hull, 2006, for an overview).
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