Affiliations: Department of Applied Mathematics, The Hong Kong Polytechnic University, Hong Kong | Department of Mathematics, The University of Hong Kong, Hong Kong
Note: [] Address for correspondence: S.P. Yung, Department of Mathematics, The University of Hong Kong, Hong Kong. E-mail: spyung@hku.hk
Abstract: In this paper, we propose a fast numerical method to evaluate discretely monitored derivatives. The key is to compute the involved probability integrals interactively. Our method can avoid the “curse of dimensionality” that most other methods suffer. Also, we give a constructive proof for explicit error estimation that based on a simple and systematic quadrature technique. The numerical frameworks are included for applications of barrier options on a stock and a short rate.
