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On an Alternative Approach to Pricing General Barrier Options

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  • Michael Suchanecki
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    Abstract

    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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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse27_2004.pdf
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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse27_2004.

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    Length: 34
    Date of creation: Oct 2004
    Date of revision:
    Handle: RePEc:bon:bonedp:bgse27_2004

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    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

    Related research

    Keywords: Barrier options; first passage time density; first hitting time density; lateral Chapman-Kolmogorov relation;

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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