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

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Author Info
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.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 133.

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Date of creation: 01 Mar 1999
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Handle: RePEc:sce:scecf9:133

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  1. Victor E. Vaugirard, 2001. "Monte Carlo applied to exotic digital options," Applied Mathematical Finance, Taylor and Francis Journals, vol. 8(3), pages 183-196, September. [Downloadable!] (restricted)
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