Posted: 1 Jun 2001
With traditional barrier options, life and death of the option are determined by the same reference index as the index underlying the original option contract. It is, however, also possible to structure options where a second reference index determines whether the option knocks in or out. In that case we say the option has an 'outside barrier' and we refer to such options as 'outside barrier options'. In this article we provide closed-form pricing formulas for 8 types of outside barrier options, assuming we live in a two-asset version of the world of Black and Scholes (1973). Analysis of our results makes it clear that, depending on the correlation between both indices in question, outside barrier options can be an interesting alternative for traditional ('inside') barrier options with a reverse barrier.
JEL Classification: G13
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