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The pricing and static hedging of multi-step double barrier options

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Listed:
  • Lee, Hangsuck
  • Ko, Bangwon
  • Lee, Minha

Abstract

As a sequel to Lee et al. (2022b), this paper explores the pricing of multi-step double barrier options with arbitrary European-type payoffs from a static hedging perspective. Using the reflection principle of Brownian motion, we develop how to construct an exact static hedging portfolio consisting of simple discrete barrier options under the Black–Scholes model. This equivalent conversion from continuous monitoring to discrete ones provides an efficient way of evaluating multi-step double barrier options, while overcoming the drawbacks of dynamic hedging. We illustrate our result with numerical examples, and extend it to other asset price dynamics such as jump diffusion.

Suggested Citation

  • Lee, Hangsuck & Ko, Bangwon & Lee, Minha, 2023. "The pricing and static hedging of multi-step double barrier options," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002623
    DOI: 10.1016/j.frl.2023.103890
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    References listed on IDEAS

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    4. Lee, Hangsuck & Choi, Yang Ho & Lee, Gaeun, 2022. "Multi-step barrier products and static hedging," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
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    More about this item

    Keywords

    Black–Scholes option price; Jump diffusion; Multi-step double barrier option; Static hedging;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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