Abstract
The binomial tree method, first proposed by Cox, Ross, and Rubinstein (Journal of Financial Economics, 7 (1979), pp. 229-263), is one of the most popular approaches to pricing options. By introducing an additional path-dependent variable, such methods can be readily extended to the valuation of path-dependent options. In this paper, using numerical analysis and the notion of viscosity solutions, we present a unifying theoretical framework to show the uniform convergence of binomial tree methods for European/American path-dependent options, including arithmetic average options, geometric average options, and lookback options.
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