Abstract
An alternative and simple algorithm for valuating the price of discrete barrier options is presented. This algorithm computes the price just exactly the same as the Cox–Ross–Rubinstein (CRR) model. As opposed to other pricing methodologies, this recursive algorithm utilizes only the terminal nodes of the binomial tree and it captures the intrinsic property, the knock-in or knock-out feature, of barrier options. In this paper, we apply the algorithm to compute the price of an Up and Out Put (UOP) barrier option and compare the results obtained from the CRR model. We then determine the time complexity of the algorithm and show that it is [Formula: see text].
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