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Valuation of American partial barrier options

Author

Listed:
  • Doobae Jun
  • Hyejin Ku
Abstract
This paper concerns barrier options of American type where the underlying asset price is monitored for barrier hits during a part of the option’s lifetime. Analytic valuation formulas of the American partial barrier options are provided as the finite sum of bivariate normal distribution functions. This approximation method is based on barrier options along with constant early exercise policies. In addition, numerical results are given to show the accuracy of the approximating price. Our explicit formulas provide a very tight lower bound for the option values, and moreover, this method is superior in speed and its simplicity. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Doobae Jun & Hyejin Ku, 2013. "Valuation of American partial barrier options," Review of Derivatives Research, Springer, vol. 16(2), pages 167-191, July.
    • Handle: RePEc:kap:revdev:v:16:y:2013:i:2:p:167-191
    DOI: 10.1007/s11147-012-9081-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Partial barrier option; American option; Hitting time; Barrier approximation; G13; C65;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools

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