Abstract #300017

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JSM 2003 Abstract #300017
Activity Number: 68
Type: Invited
Date/Time: Monday, August 4, 2003 : 8:30 AM to 10:20 AM
Sponsor: International Chinese Statistical Association
Abstract - #300017
Title: On Pricing of Discrete Barrier Options
Author(s): Steven Kou*+
Companies: Columbia University
Address: Dept. of IEOR, 312 Mudd Building, New York, NY, 10027,
Keywords: Siegmund's corrected diffusion approximation ; level crossing probabilities ; Girsanov theorm
Abstract:

A barrier option is a derivative contract that is activated or extinguished when the price of the underlying asset crosses a certain level. Most models assume continuous monitoring of the barrier. However, in practice, most, if not all, of the barrier options traded are discretely monitored. Unlike their continuous counterparts, there is essentially no closed form solution available, and even numerical pricing is difficult. This paper extends an approximation by Broadie, Glasserman, and Kou (1997) for discretely monitored barrier options by covering more cases and giving a simpler proof. The techniques used here come from sequential analysis, particularly Siegmund and Yuh (1982) and Siegmund (1985).

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