Closed Form Valuation of American Barrier Options

Tempus Financial Engineering No. 4/98

5 Pages Posted: 23 Mar 1999

See all articles by Espen Gaarder Haug

Espen Gaarder Haug

Norwegian University of Life Sciences (NMBU)

Date Written: February 22, 1999

Abstract

Closed form formulae for European barrier options are well known from the literature. This is not the case for American barrier options, for which no closed form formulae have been published. One has therefore had to resort to numerical methods. Using lattice models like a binomial or a trinomial tree for valuation of barrier options is known to converge extremely slowly, compared to plain vanilla options. Methods for improving the algorithms have been described by several authors. However, these are still numerical methods that are quite computer intensive. In this paper we show how American barrier options can be valued analytically in a very simple way. This speeds up the valuation dramatically as well as give new insight into barrier option valuation.

JEL Classification: G13

Suggested Citation

Haug, Espen Gaarder, Closed Form Valuation of American Barrier Options (February 22, 1999). Tempus Financial Engineering No. 4/98. Available at SSRN: https://ssrn.com/abstract=151315 or http://dx.doi.org/10.2139/ssrn.151315

Espen Gaarder Haug (Contact Author)

Norwegian University of Life Sciences (NMBU) ( email )

As
As
Oslo, Norway, 1432
Norway

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