Barrier Option Pricing Using Adjusted Transition Probabilities

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MotivationNew ApproachResultsThe standard Cox-Ross-Rubinstein Binomial TreePrevious workFurther ExtensionsCostabile (2001) proposes a discrete time algorithm for pricingdouble constant barrier optionsCostabile (2002) proposes an extension of theCox-Ross-Rubinstein algorithm for pricing options with anexponential boundaryFiglewsky and Gao (1999) propose an adaptive mesh modelthat can be used to price constant barrier optionsThe problem with these procedures is that they are “ad hoc”solutions to specific cases; we look for a general algorithm thatallows to approximate simple (single constant barrier) as well ascomplex (single and double time-varying) barriers options.G. Barone-Adesi, N. Fusari, J. Theal Barrier Option Pricing Using Adjusted Transition Probabilities
OutlineMotivationNew ApproachResultsAdjusted Binomial (and Trinomial) Tree1 MotivationThe standard Cox-Ross-Rubinstein Binomial TreePrevious work2 New ApproachAdjusted Binomial (and Trinomial) Tree3 ResultsComparisonWhat is new?G. Barone-Adesi, N. Fusari, J. Theal Barrier Option Pricing Using Adjusted Transition Probabilities
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Barrier Option Pricing Using Adjusted Transition Probabilities

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