IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v01y1998i04ns021902499800028x.html
   My bibliography  Save this article

Pricing Multi-Asset Options with an External Barrier

Author

Listed:
  • Yue-Kuen Kwok

    (Department of Mathematics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong, China)

  • Lixin Wu

    (Department of Mathematics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong, China)

  • Hong Yu

    (Department of Mathematics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong, China)

Abstract

An external barrier of an option contract is a stochastic variable which determines whether the option is knocked in or out when the value of the variable is above or below some predetermined level, but itself is not the price of an asset which underlies the option. In this paper, we present analytic formulation for the valuation of European options on one or multiple assets with single external barrier, where the barrier level can be exponential. As the domain of the problem becomes semi-infinite due to the presence of the external barrier, we employ the method of images to find the Green function of the governing differential equation. An efficient and accurate fractional step finite difference scheme is proposed for the numerical valuation of these barrier options.

Suggested Citation

  • Yue-Kuen Kwok & Lixin Wu & Hong Yu, 1998. "Pricing Multi-Asset Options with an External Barrier," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(04), pages 523-541.
  • Handle: RePEc:wsi:ijtafx:v:01:y:1998:i:04:n:s021902499800028x
    DOI: 10.1142/S021902499800028X
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S021902499800028X
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://libkey.io/10.1142/S021902499800028X?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Donghyun Kim & Ji-Hun Yoon, 2023. "Analytic Method for Pricing Vulnerable External Barrier Options," Computational Economics, Springer;Society for Computational Economics, vol. 61(4), pages 1561-1591, April.
    2. Yang, Nian & Chen, Nan & Liu, Yanchu & Wan, Xiangwei, 2017. "Approximate arbitrage-free option pricing under the SABR model," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 198-214.
    3. Kim, Jerim & Kim, Jeongsim & Joo Yoo, Hyun & Kim, Bara, 2015. "Pricing external barrier options in a regime-switching model," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 123-143.
    4. Guangming Xue & Bin Qin & Guohe Deng, 2018. "Valuation on an Outside-Reset Option with Multiple Resettable Levels and Dates," Complexity, Hindawi, vol. 2018, pages 1-13, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:01:y:1998:i:04:n:s021902499800028x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.