This article aims to estimate the fair-value of flexi-forwards, popular financial instruments on currencies, through Leisen–Reimer trees. The first part of paper deals with Markov chains suitable for pricing American options: Cox–Ross–Rubinstein, Jarrow–Rudd, Tian, Leisen–Reimer Trees. The correctness of the implementation in Matlab has been tested by comparing their prices with those obtained through approximated closed-formulas. The second part highlights the better performance of Leisen–Reimer trees in terms of convergence speed and sensitivity. Finally, flexi-forward contracts have been priced by using the numerical methodologies which have outperformed in the previous parts.
Flexible-forward pricing through Leisen–Reimer trees: Implementation and performance comparison with traditional Markov chains
Pier Giuseppe Giribone;Simone Ligato
2016-01-01
Abstract
This article aims to estimate the fair-value of flexi-forwards, popular financial instruments on currencies, through Leisen–Reimer trees. The first part of paper deals with Markov chains suitable for pricing American options: Cox–Ross–Rubinstein, Jarrow–Rudd, Tian, Leisen–Reimer Trees. The correctness of the implementation in Matlab has been tested by comparing their prices with those obtained through approximated closed-formulas. The second part highlights the better performance of Leisen–Reimer trees in terms of convergence speed and sensitivity. Finally, flexi-forward contracts have been priced by using the numerical methodologies which have outperformed in the previous parts.
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