Pricing external barrier options in a regime-switching model

Jerim Kim, Jeongsim Kim, Hyun Joo Yoo, Bara Kim

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

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 languageEnglish
Pages (from-to)123-143
Number of pages21
JournalJournal of Economic Dynamics and Control
Volume53
DOIs
Publication statusPublished - 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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