Rate of convergence for discrete approximation of option prices

2012/07/29 by Lauri Viitasaari, Viitasaari, Lauri
Economics, Econometrics and Finance · Mathematics · #91G20 #91G60 #Capital Investment and Risk Analysis #FOS: Mathematics #Probability (math.PR) #Stochastic processes and financial applications #math.PR #msc:91G20 #msc:91G60

paper · pdf · doi:10.48550/arxiv.1207.6756

34 pages

openalex publication_date 2012/07/29 · arxiv created 2013/01/07 · arxiv updated 2013/01/08 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

In this article, we study the rate of convergence of prices when a model is approximated by some simplified model. We also provide a method how explicit error formula for more general options can be obtained if such formula is available for digital option prices. We illustrate our results by considering convergence of binomial prices to Black-Scholes prices. We also consider smooth convergence in which the approximation does not oscillate for general class of payoff functions.

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