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Extension of the corrected barrier approximation by Broadie, Glasserman, and Kou

Author

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  • Per Hörfelt

    () (Department of Mathematics, Chalmers University of Technology, SE-412 96 Göteborg, Sweden Manuscript)

Abstract

This paper considers the problem of pricing discrete barrier options. A discrete barrier option is a barrier option where the barrier is monitored only at specific dates. This paper continues the work initiated by Broadie et al. in [B-G-K] and determine formulas to estimate the price of discrete up-and-out/in calls, down-and-out/in puts and double barrier options. Numerical examples presented in this paper show that the formulas yield good results.

Suggested Citation

  • Per Hörfelt, 2003. "Extension of the corrected barrier approximation by Broadie, Glasserman, and Kou," Finance and Stochastics, Springer, vol. 7(2), pages 231-243.
  • Handle: RePEc:spr:finsto:v:7:y:2003:i:2:p:231-243 Note: received: February 2001; final version received: April 2002
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    References listed on IDEAS

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    1. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    2. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
    5. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    7. Philippe Artzner & Freddy Delbaen, 1995. "Default Risk Insurance And Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 5(3), pages 187-195.
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    More about this item

    Keywords

    Option pricing; discrete barrier options; heavy traffic approximation;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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