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Valuation of Barrier Options in a Black-Scholes Setup with Jump Risk

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  • Dietmar P. J. Leisen

    (Stanford University and University of Bonn)

Abstract

This paper discusses the pitfalls in the pricing of barrier options using approximations 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 models, unpredictable discontinuous price movements are incorporated.

Suggested Citation

  • Dietmar P. J. Leisen, 1999. "Valuation of Barrier Options in a Black-Scholes Setup with Jump Risk," Computing in Economics and Finance 1999 133, Society for Computational Economics.
    • Handle: RePEc:sce:scecf9:133
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    Cited by:

    1. Victor Vaugirard, 2001. "Monte Carlo applied to exotic digital options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(3), pages 183-196.
    2. Victor Vaugirard, 2003. "Valuing catastrophe bonds by Monte Carlo simulations," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 75-90.

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