Let p(S,M,t) denote the price function of the European floating strike lookback put option. Define x = ln M/S and V (x,t) = p(S,M,t)/S. The pricing formulation of V (x,t) is given by

The final and boundary conditions are

Suppose the boundary condition at x = 0 is approximated by 

then the numerical boundary value is given by 

Let T₀ⁿ denote the local truncation error at j = 0 of the above binomial scheme, show that

Therefore, the proposed binomial scheme is not consistent.

Transcribed Image Text:

av - at + o2 a2V 2 до 2 +9 2) 2 av —– ax - · qV = 0, x > 0, 0 < t < T.