Pricing Double Barrier Options: An Analytical Approach
AbstractDouble barrier options have become popular instruments in derivative markets. Several papers_new have already analyseddouble knock-out call and put options using different methods. In a recent paper, Geman and Yor (1996) deriveexpressions for the Laplace transform of the double barrrier option price. However, they have to resort to numericalinversion of the Laplace transform to obtain option prices. In this paper, we are able to solve, using contour integration,the inverse of the Laplace transforms analytically thereby eliminating the need for numerical inversion routines. To ourknowledge, this is one of the first applications of contour integration to option pricing problems. To illustrate the power ofthis method, we derive analytical valuation formulas for a much wider variety of double barrier options than has beentreated in the literature so far. Many of these variants are nowadays being traded in the markets. Especially, options whichpay a fixed amount of money (a "rebate") as soon as one of the barriers is hit and double barrier knock-in options.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 1997 with number 130.
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- Antoon Pelsser, 1997. "Pricing Double Barrier Options: An Analytical Approach," Tinbergen Institute Discussion Papers 97-015/2, Tinbergen Institute.
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- Goldman, M Barry & Sosin, Howard B & Gatto, Mary Ann, 1979. "Path Dependent Options: "Buy at the Low, Sell at the High"," Journal of Finance, American Finance Association, vol. 34(5), pages 1111-27, December.
- Naoto Kunitomo & Masayuki Ikeda, 1992. "Pricing Options With Curved Boundaries," Mathematical Finance, Wiley Blackwell, vol. 2(4), pages 275-298.
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- Dell'Era Mario, M.D., 2008. "Pricing of the European Options by Spectral Theory," MPRA Paper 17429, University Library of Munich, Germany.
- Dell'Era Mario, M.D., 2008. "Pricing of Double Barrier Options by Spectral Theory," MPRA Paper 17502, University Library of Munich, Germany.
- Sbuelz, A., 2000. "Hedging Double Barriers with Singles," Discussion Paper 2000-112, Tilburg University, Center for Economic Research.
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