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Two asset-barrier option under stochastic volatility

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  • Barbara Goetz
  • Marcos Escobar
  • Rudi Zagst

Abstract

Financial products which depend on hitting times for two underlying assets have become very popular in the last decade. Three common examples are double-digital barrier options, two-asset barrier spread options and double lookback options. Analytical expressions for the joint distribution of the endpoints and the maximum and/or minimum values of two assets are essential in order to obtain quasi-closed form solutions for the price of these derivatives. Earlier authors derived quasi-closed form pricing expressions in the context of constant volatility and correlation. More recently solutions were provided in the presence of a common stochastic volatility factor but with restricted correlations due to the use of a method of images. In this article, we generalize this finding by allowing any value for the correlation. In this context, we derive closed-form expressions for some two-asset barrier options.

Suggested Citation

  • Barbara Goetz & Marcos Escobar & Rudi Zagst, 2017. "Two asset-barrier option under stochastic volatility," Applied Mathematical Finance, Taylor & Francis Journals, vol. 24(6), pages 520-546, November.
    • Handle: RePEc:taf:apmtfi:v:24:y:2017:i:6:p:520-546
    DOI: 10.1080/1350486X.2017.1419910
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    Cited by:

    1. Ha, Mijin & Kim, Donghyun & Yoon, Ji-Hun, 2024. "Valuing of timer path-dependent options," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 215(C), pages 208-227.

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