On Pricing Barrier Options

THE J. OF DERIVATIVES, Vol. 3 No. 2, Winter 1995

Posted: 13 Jul 1998

See all articles by Peter H. Ritchken

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

Abstract

Pricing and hedging barrier options using a binomial lattice can be quite delicate. If the barrier is not constant, or if there are multiple barriers, then in all likelihood binomial lattices will produce erroneous answers even when a large number of time steps are used. While in some cases the time partitions of the binomial method can be carefully chosen so as to reduce the bias, for many barrier contracts more efficient procedures exist. This article explains how a very simple and extremely efficient trinomial lattice procedure can be used to price and hedge most types of exotic barriers.

JEL Classification: E37

Suggested Citation

Ritchken, Peter H., On Pricing Barrier Options. THE J. OF DERIVATIVES, Vol. 3 No. 2, Winter 1995. Available at SSRN: https://ssrn.com/abstract=7063

Peter H. Ritchken (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)

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