Pricing Bounds on Barrier Options (forthcoming in "Journal of Futures Markets")

Yukihiro Tsuzuki
Additional contact information
Yukihiro Tsuzuki: The University of Tokyo

No CARF-F-325, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper proposes the optimal pricing bounds on barrier options in an environment where plain-vanilla options and no-touch options can be used as hedging instruments. Super-hedging and sub-hedging portfolios are derived without specifying any underlying processes, which are static ones consisting of not only plain-vanilla options but also cash-paying no-touch options and/or asset paying no-touch options that pay one cash or one underlying asset respectively if the barrier has not been hit. Moreover, the prices of these portfolios turn out to be the optimal pricing bounds through finding risk-neutral measures under which the barrier option price is equal to the hedging portfolio's value. The model-independent pricing bounds are useful because a price of a barrier option is significantly dependent on a model. It is demonstrated through numerical examples that prices outside the pricing bounds can be produced by models which are calibrated to market prices of plain-vanilla options, but not to that of a no-touch option.

Pages: 16 pages
Date: 2013-08
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/F325.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf325

Access Statistics for this paper

More papers in CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo Contact information at EDIRC.
Bibliographic data for series maintained by ().