On the valuation of constant barrier options under spectrally one-sided exponential Lévy models and Carr's approximation for American puts. (Q1766027)

The paper studies pricing formulae for barrier options (including American puts) when the underlying asset value follows a spectrally one-sided Lévy process (i.e.\ the support of the Lévy measure of its jumps is contained in either the positive or the negative half-axis). The approach to pricing is an extension of P. Carr's method of the so-called Canadian options (the latter have random expiration times with a Poisson distribution). For a Canadian-American put option, the optimal exercise boundary is a constant. Therefore, it becomes possible to restrict the analysis to constant barrier contingent claims. The P. Carr's method of American put price approximation, based on approximating the original contingent claim fixed expiration time by a sequence of Poissonian expiration moments converging to it in expectation, is extended from diffusion to one-side jump Lévy underlying asset processes. For the latter, the authors study the cumulant generating function of its ``surplus over the barrier'' process. The pricing formula uses the Laplace transform of the approximating Canadian option value (in the initial underlying value) in terms of the said cumulant generating function. A special section applies the general results of the paper to the special case of a Canadian put on a purely Poissonian underlying process with exponential jump sizes.