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Two extensions to barrier option valuation

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  • P. Carr
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    Abstract

    We first present a brief but essentially complete survey of the literature on barrier option pricing. We then present two extensions of European up-and-out call option valuation. The first allows for an initial protection period during which the option cannot be knocked out. The second considers an option which is only knocked out if a second asset touches an upper barrier. Closed form solutions, detailed derivations, and the economic rationale for both types of options are provided.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504869500000010
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 2 (1995)
    Issue (Month): 3 ()
    Pages: 173-209

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    Handle: RePEc:taf:apmtfi:v:2:y:1995:i:3:p:173-209

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    Web page: http://www.tandfonline.com/RAMF20

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    Related research

    Keywords: option pricing; exotic options;

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    Cited by:
    1. Norland, Erik & Wilford, D. Sykes, 2002. "Leverage, liquidity, volatility, time horizon, and the risk of ruin: A barrier option approach," Review of Financial Economics, Elsevier, vol. 11(3), pages 225-239.
    2. Jan Ericsson & Joel Reneby, 2003. "Stock options as barrier contingent claims," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(2), pages 121-147.
    3. Dietmar P.J. Leisen, 1999. "Valuation of Barrier Options in a Black--Scholes Setup with Jump Risk," Discussion Paper Serie B 446, University of Bonn, Germany.
    4. Julien Azzaz & Stéphane Loisel & Pierre-Emmanuel Thérond, 2013. "Some characteristics of an equity security next-year impairment," Working Papers hal-00820929, HAL.
    5. Zvan, R. & Vetzal, K. R. & Forsyth, P. A., 2000. "PDE methods for pricing barrier options," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1563-1590, October.
    6. Grant Armstrong, 2001. "Valuation formulae for window barrier options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(4), pages 197-208.
    7. Hans-Peter Bermin, 2000. "Hedging lookback and partial lookback options using Malliavin calculus," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(2), pages 75-100.
    8. Ballestra, Luca Vincenzo & Pacelli, Graziella & Zirilli, Francesco, 2007. "A numerical method to price exotic path-dependent options on an underlying described by the Heston stochastic volatility model," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3420-3437, November.
    9. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742, Octomber.
    10. Tristan Guillaume, 2001. "valuation of options on joint minima and maxima," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(4), pages 209-233.
    11. Jokivuolle, Esa & Keppo, Jussi, 2014. "Bankers' compensation: Sprint swimming in short bonus pools?," Research Discussion Papers 2/2014, Bank of Finland.

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