Analytical Valuation of Exotic Double Barrier Options

This article derives the bivariate joint probability distribution functions of a geometric Brownian motion and the extreme values of another geometric Brownian. Based on the probability distribution functions, the authors develop the analytical pricing formulas of three exotic double barrier options...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of derivatives 2021-04, Vol.28 (3), p.97-122
Main Authors: Chang, Jui-Jane, Pai, Hui-Ming, Wu, Ting-Pin
Format: Article
Language:English
Subjects:
Binomial distribution
Brownian motion
Interest rates
Investments
Investors
Numerical analysis
Probability
Probability distribution
Securities markets
Securities prices
Structured notes
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This article derives the bivariate joint probability distribution functions of a geometric Brownian motion and the extreme values of another geometric Brownian. Based on the probability distribution functions, the authors develop the analytical pricing formulas of three exotic double barrier options (DBOs) with continuously monitored barriers, including rainbow DBOs, protected DBOs, and protected rainbow DBOs. By using the continuity correction of barriers proposed in research by Doobae Jun, the aforementioned pricing formulas can be further extended to price the three exotic DBOs with discretely monitored barriers. Some numerical examples are also provided for end-users to examine the pricing accuracy and efficiency and the properties of the exotic DBOs. TOPICS: Derivatives, options Key Findings ▪ This article derives the bivariate joint probability distribution functions of a geometric Brownian motion and the extreme values of another geometric Brownian. ▪ This article develops the analytical pricing formulas of three exotic double barrier options (DBOs) with continuously monitored barriers, including rainbow DBOs, protected DBOs, and protected rainbow DBOs. ▪ By using the continuity correction of barriers proposed in research by Doobae Jun, the three exotic double barrier options with discretely monitored barriers are also developed.
ISSN:1074-1240
2168-8524
DOI:10.3905/jod.2020.1.118