A Differential Tree Approach to Price Path-Dependent American Options using Malliavin Calculus

Henry Schellhorn, Hedley Morris, Sio-Iong Ao
2009 AIP Conference Proceedings  
We propose a recursive schemes to calculate backward the values of conditional expectations of functions of path values of Brownian motion. This scheme is based on the Clark-Ocone formula in discrete time. We suggest an algorithm based on our scheme to effectively calculate the price of American options on securities with path-dependent payoffs. For problems where the pathdependence comes only from the path-dependence of the state variables our method is less subject to the curse of
more » ... urse of dimensionality observed in all other methods.
doi:10.1063/1.3146195 fatcat:nfppcruhdfa23kp2tokcmanwxa