RT Journal Article
SR Electronic
T1 Pricing Discretely Monitored Barrier Options by a Markov Chain
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 9
OP 31
DO 10.3905/jod.2003.319203
VO 10
IS 4
A1 Jin-Chuan Duan
A1 Evan Dudley
A1 Geneviève Gauthier
A1 Jean-Guy Simonato
YR 2003
UL https://pm-research.com/content/10/4/9.abstract
AB Barrier options have become commonplace in the option market, and a variety of other financial contracts may also be thought of in terms of barrier options. But the existence of a price barrier can significantly complicate the option valuation problem when volatility is time-varying, or the barrier itself moves over time, or the barrier is only monitored at discrete intervals. In this article, Duan et al. present a new Markov chain technology for pricing barrier options that readily handles all of these problems. Out-and-in options can be valued within their framework even when volatility follows a GARCH process and a discretely monitored time-varying barrier is present.