We propose a binomial lattice approach for valuing options whose payoff depends on multiple state variables following correlated geometric Brownian processes. The proposed approach relies on two main ideas: a transformation of the underlying processes as in the log-transformed binomial lattice approach by Trigeorgis (1991), and a change of basis of the asset span, to transform them into uncorrelated processes. These features improve the efficiency of the multi-dimensional binomial algorithm. We provide a thorough test of efficiency compared to most popular lattice approaches for multi-dimensional diffusions. Although the order of convergence is the same as in the other approaches the proposed approach shows improved efficiency
A Log-Transformed Binomial Lattice Approach for Valuing Multi-Assets Options
GAMBA, Andrea;
2002-01-01
Abstract
We propose a binomial lattice approach for valuing options whose payoff depends on multiple state variables following correlated geometric Brownian processes. The proposed approach relies on two main ideas: a transformation of the underlying processes as in the log-transformed binomial lattice approach by Trigeorgis (1991), and a change of basis of the asset span, to transform them into uncorrelated processes. These features improve the efficiency of the multi-dimensional binomial algorithm. We provide a thorough test of efficiency compared to most popular lattice approaches for multi-dimensional diffusions. Although the order of convergence is the same as in the other approaches the proposed approach shows improved efficiency
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