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Discrete Dynamics in Nature and Society
Volume 2016 (2016), Article ID 2474305, 14 pages
Research Article

Efficient Lattice Method for Valuing of Options with Barrier in a Regime Switching Model

1Department of Mathematics, Yonsei University, Seoul 120-749, Republic of Korea
2Department of Mathematical Science, Seoul National University, Seoul 151-747, Republic of Korea

Received 25 July 2016; Revised 7 September 2016; Accepted 14 September 2016

Academic Editor: Francisco R. Villatoro

Copyright © 2016 Youngchul Han and Geonwoo Kim. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


We propose an efficient lattice method for valuation of options with barrier in a regime switching model. Specifically, we extend the trinomial tree method of Yuen and Yang (2010) by calculating the local average of prices near a node of the lattice. The proposed method reduces oscillations of the lattice method for pricing barrier options and improves the convergence speed. Finally, computational results for the valuation of options with barrier show that the proposed method with interpolation is more efficient than the other tree methods.