Abstract
External barrier options are two-asset options where the payoff is defined on one asset and the barrier is defined on another asset. In this paper, we derive the Laplace transforms of the prices and deltas for the external single and double barrier options where the underlying asset prices follow a regime-switching model with finite regimes. The derivation is made possible because we can obtain the joint Laplace transform of the first passage time of one asset value and the value of the other asset. Numerical inversion of the Laplace transforms is used to calculate the prices of external barrier options.
| Original language | English |
|---|---|
| Pages (from-to) | 123-143 |
| Number of pages | 21 |
| Journal | Journal of Economic Dynamics and Control |
| Volume | 53 |
| DOIs | |
| Publication status | Published - 2015 Apr 1 |
Keywords
- External barrier option
- First passage time
- Laplace transform
- Option price
- Regime-switching
- Sylvester matrix equation
ASJC Scopus subject areas
- Economics and Econometrics
- Control and Optimization
- Applied Mathematics
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Cite this
Kim, J., Kim, J., Joo Yoo, H., & Kim, B. (2015). Pricing external barrier options in a regime-switching model. Journal of Economic Dynamics and Control, 53, 123-143. https://doi.org/10.1016/j.jedc.2015.02.007