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On an Alternative Approach to Pricing General Barrier Options

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  • Suchanecki, Michael

Abstract

In this paper, an alternative approach to pricing barrier options is presented that relies on the use of the first hitting time density to the barrier. The lateral Chapman-Kolmogorov relation is used as a major tool in order to determine option prices. It turns out that this approach allows for pricing barrier options with more general payoffs and with general continuous Markovian stochastic processes as underlying (at least numerically). As an illustrative example, a simple down-and-in call option is considered and its well-known closed form pricing formula is obtained.

Suggested Citation

  • Suchanecki, Michael, 2004. "On an Alternative Approach to Pricing General Barrier Options," Bonn Econ Discussion Papers 27/2004, University of Bonn, Bonn Graduate School of Economics (BGSE).
    • Handle: RePEc:zbw:bonedp:272004
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    File URL: https://www.econstor.eu/bitstream/10419/22904/1/bgse27_2004.pdf
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    References listed on IDEAS

    as
    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. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Barrier options; first passage time density; first hitting time density; lateral Chapman-Kolmogorov relation;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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