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Path Integral Method for Pricing Proportional Step Double-Barrier Option with Time Dependent Parameters

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  • Qi Chen
  • Chao Guo

Abstract

Path integral method in quantum mechanics provides a new thinking for barrier option pricing. For proportional double-barrier step (PDBS) options, the option price changing process is analogous to a particle moving in a finite symmetric square potential well. We have derived the pricing kernel of PDBS options with time dependent interest rate and volatility. Numerical results of option price as a function of underlying asset price are shown as well. Path integral method can be easily generalized to the pricing of PDBS options with curved boundaries.

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  • Qi Chen & Chao Guo, 2023. "Path Integral Method for Pricing Proportional Step Double-Barrier Option with Time Dependent Parameters," Papers 2302.07631, arXiv.org.
    • Handle: RePEc:arx:papers:2302.07631
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    File URL: http://arxiv.org/pdf/2302.07631
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