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Piecewise linear double barrier options

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  • Hangsuck Lee
  • Hongjun Ha
  • Minha Lee

Abstract

A piecewise linear double barrier option generalizes classical double barrier options because of its versatility in designing various double boundaries. This paper discusses how to price piecewise linear double barrier options. To this purpose, we derive the probability that an underlying process does not cross a given piecewise linear double barrier, where the underlying process follows the Brownian motion of piecewise constant drift. Using the established non‐crossing probability, we provide the explicit pricing formulas of piecewise linear double barrier options and show how the shape of a double barrier affects the option prices through extensive numerical experiments.

Suggested Citation

  • Hangsuck Lee & Hongjun Ha & Minha Lee, 2022. "Piecewise linear double barrier options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(1), pages 125-151, January.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:1:p:125-151
    DOI: 10.1002/fut.22279
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    References listed on IDEAS

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    1. Lee, Hangsuck & Ha, Hongjun & Lee, Minha, 2021. "Valuation of piecewise linear barrier options," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    2. Lee, Hangsuck & Ko, Bangwon & Song, Seongjoo, 2019. "Valuing step barrier options and their icicled variations," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 396-411.
    3. Ng, Andrew Cheuk-Yin & Li, Johnny Siu-Hang, 2011. "Valuing variable annuity guarantees with the multivariate Esscher transform," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 393-400.
    4. Tristan Guillaume, 2010. "Step double barrier options," Post-Print hal-00924266, HAL.
    5. Gerber, Hans U. & Shiu, Elias S. W., 1996. "Actuarial bridges to dynamic hedging and option pricing," Insurance: Mathematics and Economics, Elsevier, vol. 18(3), pages 183-218, November.
    6. Choe, Geon Ho & Koo, Ki Hwan, 2014. "Probability of multiple crossings and pricing of double barrier options," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 156-184.
    7. Peter Buchen & Otto Konstandatos, 2009. "A New Approach to Pricing Double-Barrier Options with Arbitrary Payoffs and Exponential Boundaries," Applied Mathematical Finance, Taylor & Francis Journals, vol. 16(6), pages 497-515.
    8. Naoto Kunitomo & Masayuki Ikeda, 1992. "Pricing Options With Curved Boundaries1," Mathematical Finance, Wiley Blackwell, vol. 2(4), pages 275-298, October.
    9. Liqun Wang & Klaus Pötzelberger, 2007. "Crossing Probabilities for Diffusion Processes with Piecewise Continuous Boundaries," Methodology and Computing in Applied Probability, Springer, vol. 9(1), pages 21-40, March.
    10. Hélyette Geman & Marc Yor, 1996. "Pricing And Hedging Double‐Barrier Options: A Probabilistic Approach," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 365-378, October.
    11. Otto Konstandatos, 2018. "Methods for Analytical Barrier Option Pricing with Multiple Exponential Time-Varying Boundaries," Research Paper Series 396, Quantitative Finance Research Centre, University of Technology, Sydney.
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    Cited by:

    1. Lee, Hangsuck & Lee, Gaeun & Song, Seongjoo, 2023. "Min–max multi-step barrier options and their variants," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    2. Lee, Hangsuck & Jeong, Himchan & Lee, Minha, 2022. "Multi-step double barrier options," Finance Research Letters, Elsevier, vol. 47(PA).

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