Abstract.
This paper develops methods for relating the prices of discrete- and continuous-time versions of path-dependent options sensitive to extremal values of the underlying asset, including lookback, barrier, and hindsight options. The relationships take the form of correction terms that can be interpreted as shifting a barrier, a strike, or an extremal price. These correction terms enable us to use closed-form solutions for continuous option prices to approximate their discrete counterparts. We also develop discrete-time discrete-state lattice methods for determining accurate prices of discrete and continuous path-dependent options. In several cases, the lattice methods use correction terms based on the connection between discrete- and continuous-time prices which dramatically improve convergence to the accurate price.
Similar content being viewed by others
Author information
Authors and Affiliations
Additional information
Manuscript received: December 1996; final version received: December 1997
Rights and permissions
About this article
Cite this article
Broadie, M., Glasserman, P. & Kou, S. Connecting discrete and continuous path-dependent options. Finance Stochast 3, 55–82 (1999). https://doi.org/10.1007/s007800050052
Issue Date:
DOI: https://doi.org/10.1007/s007800050052