A new approach to pricing double-barrier options with arbitrary payoffs and exponential boundaries

Buchen, P; Konstandatos, O

A new approach to pricing double-barrier options with arbitrary payoffs and exponential boundaries

Buchen, P Konstandatos, O

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Publication Type:: Journal Article
Citation:: Applied Mathematical Finance, 2009, 16 (6), pp. 497 - 515
Issue Date:: 2009-11-20

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Field	Value	Language
dc.contributor.author	Buchen, P	en_US
dc.contributor.author	Konstandatos, O https://orcid.org/0000-0002-3797-391X	en_US
dc.date.issued	2009-11-20	en_US
dc.identifier.citation	Applied Mathematical Finance, 2009, 16 (6), pp. 497 - 515	en_US
dc.identifier.issn	1350-486X	en_US
dc.identifier.uri	http://hdl.handle.net/10453/8264
dc.description.abstract	We consider in this article the arbitrage free pricing of double knock-out barrier options with payoffs that are arbitrary functions of the underlying asset, where we allow exponentially time-varying barrier levels in an otherwise standard Black-Scholes model. Our approach, reminiscent of the method of images of electromagnetics, considerably simplifies the derivation of analytical formulae for this class of exotics by reducing the pricing of any double-barrier problem to that of pricing a related European option. We illustrate the method by reproducing the well-known formulae of Kunitomo and Ikeda (1992) for the standard knock-out double-barrier call and put options. We give an explanation for the rapid rate of convergence of the doubly infinite sums for affine payoffs in the stock price, as encountered in the pricing of double-barrier call and put options first observed by Kunitomo and Ikeda (1992).	en_US
dc.relation.ispartof	Applied Mathematical Finance	en_US
dc.relation.isbasedon	10.1080/13504860903075480	en_US
dc.subject.classification	Finance	en_US
dc.title	A new approach to pricing double-barrier options with arbitrary payoffs and exponential boundaries	en_US
dc.type	Journal Article
utslib.citation.volume	6	en_US
utslib.citation.volume	16	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	0102 Applied Mathematics	en_US
utslib.for	0103 Numerical and Computational Mathematics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	closed_access
pubs.issue	6	en_US
pubs.publication-status	Published	en_US
pubs.volume	16	en_US

Abstract:

We consider in this article the arbitrage free pricing of double knock-out barrier options with payoffs that are arbitrary functions of the underlying asset, where we allow exponentially time-varying barrier levels in an otherwise standard Black-Scholes model. Our approach, reminiscent of the method of images of electromagnetics, considerably simplifies the derivation of analytical formulae for this class of exotics by reducing the pricing of any double-barrier problem to that of pricing a related European option. We illustrate the method by reproducing the well-known formulae of Kunitomo and Ikeda (1992) for the standard knock-out double-barrier call and put options. We give an explanation for the rapid rate of convergence of the doubly infinite sums for affine payoffs in the stock price, as encountered in the pricing of double-barrier call and put options first observed by Kunitomo and Ikeda (1992).

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http://hdl.handle.net/10453/8264