TY - JOUR
T1 - Pricing discretely monitored barrier options under markov processes through markov chain approximation
AU - Cui, Zhenyu
AU - Taylor, Stephen
N1 - Publisher Copyright:
© 2021 Journal of Derivatives. All rights reserved.
PY - 2021/3
Y1 - 2021/3
N2 - The authors propose an explicit closed-form approximation formula for the price of discretely monitored single or double barrier options with an underlying asset that evolves according to a one-dimensional Markov process, which includes diffusion and jump-diffusion processes. The prices and Greeks of a discretely monitored double barrier option are explicitly expressed in terms of rudimentary matrix operations. In addition, this framework may be extended to include additional features of barrier options often encountered in practice—for example, time-dependent barriers and nonuniform monitoring time intervals. They provide numerical examples to demonstrate the accuracy and efficiency of the proposed formula as well as its ability to reproduce existing benchmark results in the relevant literature in a unified framework.
AB - The authors propose an explicit closed-form approximation formula for the price of discretely monitored single or double barrier options with an underlying asset that evolves according to a one-dimensional Markov process, which includes diffusion and jump-diffusion processes. The prices and Greeks of a discretely monitored double barrier option are explicitly expressed in terms of rudimentary matrix operations. In addition, this framework may be extended to include additional features of barrier options often encountered in practice—for example, time-dependent barriers and nonuniform monitoring time intervals. They provide numerical examples to demonstrate the accuracy and efficiency of the proposed formula as well as its ability to reproduce existing benchmark results in the relevant literature in a unified framework.
KW - Derivatives
KW - Options
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U2 - 10.3905/JOD.2020.1.116
DO - 10.3905/JOD.2020.1.116
M3 - Article
AN - SCOPUS:85103477281
SN - 1074-1240
VL - 28
SP - 8
EP - 33
JO - Journal of Derivatives
JF - Journal of Derivatives
IS - 3
ER -