Question: Given a setting in which the range option in the previous question pays off when the stock price at the end of each month lies

Given a setting in which the range option in the previous question pays off when the stock price at the end of each month lies outside the specified range rather than inside it, what is the modification you would impose on the boundaries of the lattice?

Data in previous question

The following question relates to the Black-Scholes model, which is based on a geometric Brownian motion. You are asked to price a one-year range option where the option pays off $100 at the end of each month if the price of the stock lies between $90 and $110. If you set this problem up on a finite-differencing lattice, how would you handle the values at the upper and lower boundaries of the lattice?

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In this case the option pays off in the wide range from 0 90 and from 110 At the edges ... View full answer

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