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
Date Written: January 1999
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