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CONVERGENCE OF BARRIER OPTION PRICES IN THE BINOMIAL MODEL
Sat, 14 Apr 2012 05:32:05 GMT
In this paper, we study the rate of convergence of the European barrier call option price given by the CRR binomial model to the Black–Scholes price as the number of periods 
tends to infinity. In general the error is of order 
and we give explicit formulas for the coefficients of 
and 
in the asymptotic expansion of the error. These coefficients depend on the positions of the barrier and strike in the binomial lattice and enable us to give a rigorous explanation of the observed fact that the error is of order 
when 
is chosen in an appropriate way.
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