An exact analytical solution for discrete barrier options (Q2488504): Difference between revisions
From MaRDI portal
Created a new Item |
Added link to MaRDI item. |
||
links / mardi / name | links / mardi / name | ||
Revision as of 02:47, 3 February 2024
scientific article
Language | Label | Description | Also known as |
---|---|---|---|
English | An exact analytical solution for discrete barrier options |
scientific article |
Statements
An exact analytical solution for discrete barrier options (English)
0 references
24 May 2006
0 references
The valuation problem for discrete barrier options is studied. More precisely, the authors consider the pricing problem for the down-and-out barrier option under a geometric Brownian motion process (GBM) with discrete monitoring. It is shown how to reduce its valuation to an integral equation of the Wiener-Hopf type. The latter problem admits an analytical solution in the standard Black-Scholes framework, i.e., when the underlying asset evolves accordingly to a GBM an the knock-out clause is activated by a constant barrier. The paper offers a formal solution of the barrier option price as an inverse \(z\)-transform of the Wiener-Hopf solution, and presents explicit formulas for the Greeks which makes the author's procedure really competitive with respect to Monte Carlo simulations. Numerical results are compared and contrasted with alternative numerical methods.
0 references
barrier options
0 references
discrete monitoring
0 references
Wiener-Hopf equation
0 references
Black-Scholes
0 references
\(z\)-transform
0 references