Design, implementation and validation of advanced lattice techniques for pricing EAKO — European American Knock-Out option

Abstract

The paper presents a series of advanced lattice methods aimed at evaluating an EAKO European-American Knock-Out contract. The first part of the paper deals with the numerical methods implemented for pricing: Binomial and Trinomial Stochastic trees, Adaptive Mesh Model, Pentanomial and Heptanomial lattice. In the second part, specific tests are designed to validate the code written in Matlab language. The study concludes by applying the most performing model to a real market case.