Pricing Parisian Style Options with a Lattice Method
Marco Avellaneda and Lixin Wu
IJTAF 1999

A Parisian-style barrier option expires  worthless  if the price of the underlying asset remains above or below some level(s) continuously over a specified period of time (the ``window''). A trinomial-lattice scheme is developed for calculating the price and the sensitivities of  such options. Monte Carlo simulation of  hedging events using the resulting deltas show errors which are of the same order-of-magnitude as those  found when hedging  plain-vanilla options, confirming the validity of the proposed scheme. We use these results  to  price callable and convertible bonds with the ``window'' feature.