Local time and the pricing of time-dependent barrier options
| dc.creator | Mijatovic, Aleksandar | |
| dc.date | 2008-09-10 | |
| dc.date.accessioned | 2026-07-07T12:06:00Z | |
| dc.date.available | 2026-07-07T12:06:00Z | |
| dc.description | A time-dependent double-barrier option is a derivative security that delivers the terminal value $ϕ(S_T)$ at expiry $T$ if neither of the continuous time-dependent barriers $b_\pm:[0,T]\to \RR_+$ have been hit during the time interval $[0,T]$. Using a probabilistic approach we obtain a decomposition of the barrier option price into the corresponding European option price minus the barrier premium for a wide class of payoff functions $ϕ$, barrier functions $b_\pm$ and linear diffusions $(S_t)_{t\in[0,T]}$. We show that the barrier premium can be expressed as a sum of integrals along the barriers $b_\pm$ of the option's deltas $Δ_\pm:[0,T]\to\RR$ at the barriers and that the pair of functions $(Δ_+,Δ_-)$ solves a system of Volterra integral equations of the first kind. We find a semi-analytic solution for this system in the case of constant double barriers and briefly discus a numerical algorithm for the time-dependent case. | |
| dc.description | 32 pages, to appear in Finance and Stochastics | |
| dc.identifier | https://arxiv.org/abs/0809.1747 | |
| dc.identifier | http://arxiv.org/abs/0809.1747 | |
| dc.identifier.uri | http://salesiana.dossiersoluciones.com/handle/123456789/208533 | |
| dc.subject | Pricing of Securities | |
| dc.subject | Probability | |
| dc.subject | 60H30; 45D05 | |
| dc.title | Local time and the pricing of time-dependent barrier options | |
| dc.type | text |