Local time and the pricing of path-dependent options (Q2430252): Difference between revisions

The paper is concerned with a knock-out time-dependent double barrier options. These are derivative securities which pay something only if the price of the underlying asset does not hit one of two predetermined time-dependent barriers. The main result of the paper is the representation formula, which gives the price of a barrier option in terms of limiting values of the option delta on the barriers and the transition density of the underlying asset price process. In turn, these limiting values are shown to satisfy a Volterra integral equation of the first kind. In case of constant barriers, the author manages to find solutions to the equations both for single and for double barriers in the form of the inverse Laplace transform of some explicitly given functions. For time-dependent barriers, numerical algorithms are discussed. The author also gives several auxiliary results of independent interest: a change of variables formula, analyticity properties of the barrier option price, etc.