Pricing discretely monitored barrier options under markov processes through markov chain approximation

Document Type

Article

Publication Date

3-1-2021

Abstract

The authors propose an explicit closed-form approximation formula for the price of discretely monitored single or double barrier options with an underlying asset that evolves according to a one-dimensional Markov process, which includes diffusion and jump-diffusion processes. The prices and Greeks of a discretely monitored double barrier option are explicitly expressed in terms of rudimentary matrix operations. In addition, this framework may be extended to include additional features of barrier options often encountered in practice—for example, time-dependent barriers and nonuniform monitoring time intervals. They provide numerical examples to demonstrate the accuracy and efficiency of the proposed formula as well as its ability to reproduce existing benchmark results in the relevant literature in a unified framework.

Identifier

85103477281 (Scopus)

Publication Title

Journal of Derivatives

External Full Text Location

https://doi.org/10.3905/JOD.2020.1.116

ISSN

10741240

First Page

8

Last Page

33

Issue

3

Volume

28

Grant

19-28231X

Fund Ref

Grantová Agentura České Republiky

This document is currently not available here.

Share

COinS