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The Valuation of American Barrier Options Using the Decomposition Technique

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  • B. Gao J. Huang

Abstract

In this paper, we propose an alternative approach for pricing and hedging American barrier options. Specifically, we obtain an analytic representation for the value and hedge parameters of barrier options, using the decomposition technique of separating the European option value from the early exercise premium. This allows us to identify some new put-call "symmetry" relations and the homogeneity in price parameters of the optimal exercise boundary. These properties can be utilized to increase the computational efficiency of our method in pricing and hedging American options.

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  • B. Gao J. Huang, "undated". "The Valuation of American Barrier Options Using the Decomposition Technique," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-002, New York University, Leonard N. Stern School of Business-.
  • Handle: RePEc:fth:nystfi:99-002
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    1. Peter Carr & Katrina Ellis & Vishal Gupta, 1998. "Static Hedging of Exotic Options," Journal of Finance, American Finance Association, vol. 53(3), pages 1165-1190, June.
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