Barrier Option Pricing Using Adjusted Transition Probabilities
Barrier Option Pricing Using Adjusted Transition Probabilities
Barrier Option Pricing Using Adjusted Transition Probabilities
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MotivationNew ApproachResults<strong>Adjusted</strong> Binomial (and Trinomial) TreeProcedureA Simple Example: Down-out call (DOC) with constant barrier (2)C T0p up (1 − p δtL )p downC upT 0+δtLC downT 0+δt= 0That is, wemultiply the usualprobability ofreaching the uppoint by oneminus theconditionalprobability (pL δt)that the assetsprice, in the timeinterval, hits thebarrier.G. Barone-Adesi, N. Fusari, J. Theal <strong>Barrier</strong> <strong>Option</strong> <strong>Pricing</strong> <strong>Using</strong> <strong>Adjusted</strong> <strong>Transition</strong> <strong>Probabilities</strong>
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