Valuation of Barrier Options in a Black--Scholes Setup with Jump Risk
AbstractThis paper discusses the pitfalls in the pricing of barrier options a pproximations of the underlying continuous processes via discrete lattice models. These problems are studied first in a Black-Scholes model. Improvements result from a trinomial model and a further modified model where price changes occur at the jump times of a Poisson process. After the numerical difficulties have been resolved in the Black-Scholes model, unpredictable discontinuous price movements are incorporated.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 446.
Date of creation: Jan 1999
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binomial model; option valuation; lattice--approach; barrier option;
Find related papers by JEL classification:
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-02-08 (All new papers)
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- Victor Vaugirard, 2001. "Monte Carlo applied to exotic digital options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(3), pages 183-196.
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