Valuation formulae for window barrier options

DOI10.1080/13504860210124607MaRDI QIDQ4551196zbMATH OpenOpenAlexFDO

Authors Grant F. Armstrong

Publication date 5 September 2002

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1080/13504860210124607

zbMATH Keywords

approximate risk sensitivitiesapproximating trivariate normal probabilitiesconvolution densityhedgingoption valuation formulaetrivariate normal distributionwindow barrier option

Mathematics Subject Classification ID

Microeconomic theory (price theory and economic markets) (91B24)

Review text

The main purpose of this paper is to study valuation formulae for the so-called ``window barrier options; such an option incorporates a barrier that prevails for a period commencing strictly after the start date of the option and terminates strictly before expiry. Inspired by the work of \textit{R. C. Heynan} (1984) and \textit{H. M. Kat} (1988), the author derives valuation formulae within a tripartite deterministic term-structure on interest rates and volatility, in terms of trivariate normal distribution functions. The obtained formulae offer a generalization of the valuation formulae for partial barrier options in the sense that the latter are recovered as limiting cases within a `flat' term-structure. A key benefit of this result is that the obtained formulae reduce the pricing problem for the window barrier options to the mathematical problem of approximating trivariate normal probabilities, a problem for which there exist fast, extremely accurate (published and commercially available) numerical algorithms, for instance \textit{A. Grenz} (2001). This outcome further enables a straightforward calculation of approximate risk sensitivities, and assessment of the impact of the term-structure on valuation and hedging. The section of the paper that is devoted to numerical result compares the prices of window barrier options with plain vanilla, standard barrier, late-start and early-start partial barrier options, and succeeds to show the effect of term-structure on window barrier valuation.

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Cites work

• scientific article; zbMATH DE number 942202 (Why is no real title available?)
• scientific article; zbMATH DE number 274399 (Why is no real title available?)
• scientific article; zbMATH DE number 3349081 (Why is no real title available?)
• Pricing and hedging power options
• Pricing Options With Curved Boundaries¹
• The pricing of options and corporate liabilities
• valuation of options on joint minima and maxima

Cited in

(7)

• Window double barrier options
• Very fast algorithms for implied barriers and moving-barrier options pricing
• Some sequential boundary crossing results for geometric Brownian motion and their applications in financial engineering
• On extension of the Markov chain approximation method for computing Feynman-Kac type expectations
• Analytical valuation of a general form of barrier option with stochastic interest rate and jumps
• On time-dependent boundary crossing probabilities of diffusion processes as differentiable functionals of the boundary
• Pricing derivatives with barriers in a stochastic interest rate environment

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