Numerical Analysis Questions
Lattice methods for option pricing are numerical techniques used to value options by creating a lattice or grid of possible future stock price movements. The lattice is constructed by discretizing time and modeling the stock price as a random walk. At each node of the lattice, the option value is calculated based on the expected value of the option at the next time step. By recursively calculating the option values at each node, starting from the final time step and working backwards, the option price can be determined. Lattice methods are particularly useful for pricing options with complex features or when the underlying asset follows a non-standard distribution.