Pricing double barrier options using Laplace transforms

DOI10.1007/S007800050005MaRDI QIDQ1979080zbMATH OpenOpenAlexFDO

Authors Antoon Pelsser

Publication date 24 May 2000

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s007800050005

zbMATH Keywords

contour integrationLaplace transformoption pricing

Mathematics Subject Classification ID

Heat equation (35K05) Laplace transform (44A10) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Review text

Barrier options have become very popular instruments in derivative markets as they are cheaper than standard options but offer a similar kind of protection. It is relatively straightforward to price and hedge ``single barrier options. A natural extension to ``single barrier options is double barrier options. These options have a barrier above and below the price of the underlying, and the option gets knocked in or out as soon as one of the two barriers is hit. Several papers have already analysed double knock-out and put options and derived expressions for the Laplace transform of the double barrier option price. They invert the Laplace transform numerically to obtain option prices. These papers deal, however, with one type of double barrier option: double barrier knock-out calls and puts. In this paper the author addresses the pricing of double barrier options. To derive the density function of the first-hit times of the barriers the Laplace transform is analytically inverted by contour integration. With these barrier densities pricing formulae for new types of barrier options are derived: knock-out barrier options which pay a rebate when either one of the barriers is hit. Furthermore, more complicated types of barrier options like double knock-in options are discussed.

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