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A Note on a Barrier Exchange Option: The World’s Simplest Option Formula?

Author

Listed:
  • Lindset, Snorre

    (Dept. of Industrial Economics and Technology Management, Norwegian University of Science and Technology (NTNU))

  • Persson, Svein-Arne

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

The paper analyzes a barrier exchange option that is knocked out the first time the two underlying assets have identical market values. Under rather general conditions regarding the price processes for the underlying assets, probably the world’s simplest option pricing formula is derived. It applies both to options of American and European type.

Suggested Citation

  • Lindset, Snorre & Persson, Svein-Arne, 2005. "A Note on a Barrier Exchange Option: The World’s Simplest Option Formula?," Discussion Papers 2005/5, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2005_005
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    File URL: http://hdl.handle.net/11250/163592
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    References listed on IDEAS

    as
    1. Fischer, Stanley, 1978. "Call Option Pricing when the Exercise Price Is Uncertain, and the Valuation of Index Bonds," Journal of Finance, American Finance Association, vol. 33(1), pages 169-176, March.
    2. Mark Broadie & Paul Glasserman & Steven Kou, 1997. "A Continuity Correction for Discrete Barrier Options," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 325-349, October.
    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. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Lindset, Snorre & Persson, Svein-Arne, 2008. "Continuous Monitoring: Look before You Leap," Discussion Papers 2008/8, Norwegian School of Economics, Department of Business and Management Science.
    2. Hansjörg Albrecher & Philipp Mayer, 2010. "Semi-Static Hedging Strategies For Exotic Options," World Scientific Book Chapters, in: Rüdiger Kiesel & Matthias Scherer & Rudi Zagst (ed.), Alternative Investments And Strategies, chapter 14, pages 345-373, World Scientific Publishing Co. Pte. Ltd..

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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