A Discrete Time Approach for European and American Barrier Options
University of Bonn - Institute of Statistics
University of Bonn - The Bonn Graduate School of Economics
The extension of the Black-Scholes option pricing theory to the valuation of barrier options is reconsidered. Working in the binomial framework of CRR we show how various types of barrier options can be priced either by backward induction or by closed binomial formulas. We also consider analytically and numerically the convergence of the prices in discrete time to their continuous-time limits. The arising numerical problems are solved by quadratic interpolation. Furthermore, the case of American barrier options is analyzed in detail. For American barrier call options, binomial formulae and their limit results are given. Finally, the binomial approach is applied to contracts with local and partial barrier checks.
Number of Pages in PDF File: 27
Keywords: Barrier option, binomial model, limit results
JEL Classification: G13working papers series
Date posted: April 24, 1998
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.422 seconds