On pricing arithmetic average reset options with multiple reset dates in a lattice framework

We develop a straightforward algorithm to price arithmetic average reset options withmultiple reset dates in a Cox et al. (CRR) (1979) framework. The use of a latticeapproach is due to its adaptability and flexibility in managing arithmetic average resetoptions, as already evidenced by Kim et al. (2003) . Their model is based on the Hulland White (1993) bucketing algorithm and uses an exogenous exponential functionto manage the averaging feature, but their choice of fictitious values does not guaranteethe algorithm’s convergence (cfr., Forsyth et al. (2002) ). We propose to overcome thisdrawback by selecting a limited number of trajectories among the ones reaching each nodeof the lattice, where we compute effective averages. In this way, the computational costof the pricing problem is reduced, and the convergence of the discrete time model to thecorresponding continuous time one is guaranteed.