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Double-barrier option pricing equations under extended geometric Brownian motion with bankruptcy risk

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  • Hsu, Yu-Sheng
  • Chen, Pei-Chun
  • Wu, Cheng-Hsun

Abstract

We consider an extended geometric Brownian motion with bankruptcy risk and solve its double barrier option pricing problem. We establish its partial differential equation and provide its numerical solution. Then we discuss the influence of bankruptcy omission by simulation.

Suggested Citation

  • Hsu, Yu-Sheng & Chen, Pei-Chun & Wu, Cheng-Hsun, 2022. "Double-barrier option pricing equations under extended geometric Brownian motion with bankruptcy risk," Statistics & Probability Letters, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:stapro:v:184:y:2022:i:c:s0167715222000116
    DOI: 10.1016/j.spl.2022.109383
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Goldman, M Barry & Sosin, Howard B & Gatto, Mary Ann, 1979. "Path Dependent Options: "Buy at the Low, Sell at the High"," Journal of Finance, American Finance Association, vol. 34(5), pages 1111-1127, December.
    3. Naoto Kunitomo & Masayuki Ikeda, 1992. "Pricing Options With Curved Boundaries1," Mathematical Finance, Wiley Blackwell, vol. 2(4), pages 275-298, October.
    4. Hélyette Geman & Marc Yor, 1996. "Pricing And Hedging Double‐Barrier Options: A Probabilistic Approach," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 365-378, October.
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