Valuation of Barrier Options in a Black-Scholes Setup with Jump Risk

SFB 303 Working Paper No. B - 446

28 Pages Posted: 8 Oct 1999

See all articles by Dietmar Leisen

Dietmar Leisen

Johannes Gutenberg University Mainz - Department of Banking

Multiple version iconThere are 2 versions of this paper

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

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

Dietmar P. J. Leisen (Contact Author)

Johannes Gutenberg University Mainz - Department of Banking ( email )

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