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Convergence rate of the binomial tree scheme for continuously paying options
Leduc, Guillaume
Leduc, Guillaume
Date
2012
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Type
Peer-Reviewed
Article
Published version
Article
Published version
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Abstract
Continuously Paying Options (CPOs) form a very natural class of derivatives for hedging risks coming from adverse movements of a continuously traded asset. We study the rate of convergence of CPOs evaluated under the binomial tree scheme when the payout function 𝝋 is piecewise C(2) subject to some boundedness conditions. We show that if 𝝋 is continuous, the rate of convergence is 𝑛¯¹ while it is n¯¹/² if 𝝋 is discontinuous.