Double Barrier Hitting Time Distribution of a Mean-Reverting Lognormal Process and its Application to Pricing Exotic Options

6 Pages Posted: 21 Jan 2008

See all articles by Chi-Fai Lo

Chi-Fai Lo

The Chinese University of Hong Kong

Tsz-Kin Chung

IHS Markit; Tokyo Metropolitan University

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Date Written: July 4, 2007

Abstract

In this paper we propose a simple and easy-to-use method for computing accurate estimate (in closed form) of the double barrier hitting time distribution of a mean-reverting lognormal process, and discuss its application to pricing exotic options whose payoffs are contingent upon barrier hitting times. This new approach is also able to provide tight upper and lower bounds (in closed form) of the exact result. Within the multi-stage approximation scheme, the estimate and bounds can be easily improved in a systematic manner. Furthermore, this approach can be straight-forwardly extended to those cases with specified moving boundaries as well.

Keywords: First hitting time, mean-reverting lognormal process, barrier options, method of images

JEL Classification: F31, G13

Suggested Citation

Lo, Chi-Fai and Chung, Tsz-Kin and Hui, Cho-Hoi, Double Barrier Hitting Time Distribution of a Mean-Reverting Lognormal Process and its Application to Pricing Exotic Options (July 4, 2007). Available at SSRN: https://ssrn.com/abstract=1085983 or http://dx.doi.org/10.2139/ssrn.1085983

Chi-Fai Lo (Contact Author)

The Chinese University of Hong Kong ( email )

Department of Physics
Shatin, N.T., Hong Kong
China

Tsz-Kin Chung

IHS Markit ( email )

Tokyo
Japan

Tokyo Metropolitan University

1-1 Minami Ohsawa Hachioji-shi
Tokyo 192-0397
Japan

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

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