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Barrier options in three dimensions

Author

Listed:
  • Marcos Escobar
  • Sebastian Ferrando
  • Xianzhang Wen

Abstract

The paper provides closed-form expressions for the price of several barrier type derivatives with a three-dimensional geometric Wiener process as underlying. These solutions are found for special correlation matrices and are given by linear combinations of three-dimensional Gaussian cumulative distributions. The method of images is used as a key technique to establish the solutions. Two cases are described extending the results to a wider set of correlation matrices, one case deals with random variances and the other case with random correlations.

Suggested Citation

  • Marcos Escobar & Sebastian Ferrando & Xianzhang Wen, 2014. "Barrier options in three dimensions," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 3(3), pages 260-292.
    • Handle: RePEc:ids:ijfmkd:v:3:y:2014:i:3:p:260-292
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    Cited by:

    1. Vadim Kaushansky & Alexander Lipton & Christoph Reisinger, 2017. "Transition probability of Brownian motion in the octant and its application to default modeling," Papers 1801.00362, arXiv.org, revised May 2018.

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