AN EFFICIENT BINOMIAL TREE METHOD FOR CLIQUET OPTIONS

Abstract

This work proposes a binomial method for pricing the cliquet options, which provide a guaranteed minimum annual return. The proposed binomial tree algorithm simplifies the standard binomial approach, which is problematic for cliquet options in the computational point of view, or other recent methods, which may be of intricate algorithm or require pre- or post-processing computations. Our method is simple, efficient and reliable in a Black-Scholes framework with constant interest rates and volatilities.