Download This PaperValuation of Barrier Options in a Black-Scholes Setup with Jump Risk
SFB 303 Working Paper No. B - 446
28 Pages Posted: 8 Oct 1999
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Valuation of Barrier Options in a Black-Scholes Setup with Jump Risk
SFB 303 Working Paper No. B - 446
Number of pages: 28
Posted: 08 Oct 1999
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Date Written: January 1999
Abstract
This paper discusses the pitfalls in the pricing of barrier options approximations of the underlying continuous processes via discrete lattice models. These problems are studied first in a Black-Scholes model. Improvements result from a trinomial model and a further modified model where price changes occur at the jump times of a Poisson process. After the numerical difficulties have been resolved in the Black-Scholes model, unpredictable discontinuous price movements are incorporated.
JEL Classification: C63, G12, G13
Suggested Citation: Suggested Citation
Leisen, Dietmar P. J., Valuation of Barrier Options in a Black-Scholes Setup with Jump Risk (January 1999). SFB 303 Working Paper No. B - 446, Available at SSRN: https://ssrn.com/abstract=182768 or http://dx.doi.org/10.2139/ssrn.182768
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