A Discrete Time Approach for European and American Barrier Options
AbstractThe extension of the Black-Scholes option pricing theory to the valuation of barrier options is reconsidered. Working in the binomial framework of CRR we show how various types of barrier options can be priced either by backward induction or by closed binomial formulas. We also consider analytically and numerically the convergence of the prices in discrete time to their continuous-time limits. The arising numerical problems are solved by quadratic interpolation. Furthermore, the case of American barrier options is analyzed in detail. For American barrier call options, binomial formulae and their limit results are given. Finally, the binomial approach is applied to contracts with local and partial barrier checks.(Completely revised version march 1995)
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 272.
Date of creation: Mar 1995
Date of revision:
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Arbitrage; Barrier Option; Option Pricing; Path dependent payoff;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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