In this paper, an alternative approach to pricing barrier options is presented that relies on the use of the first hitting time density to the barrier. The lateral Chapman-Kolmogorov relation is used as a major tool in order to determine option prices. It turns out that this approach allows for pricing barrier options with more general payoffs and with general continuous Markovian stochastic processes as underlying (at least numerically). As an illustrative example, a simple down-and-in call option is considered and its well-known closed form pricing formula is obtained.
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number
bgse27_2004.
Length: 34 Date of creation: Oct 2004 Date of revision: Handle: RePEc:bon:bonedp:bgse27_2004
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