Pricing external barrier options in a regime-switching model

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

Journal of Economic Dynamics and Control, 2015, vol. 53, issue C, 123-143

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.

Keywords: External barrier option; Regime-switching; First passage time; Sylvester matrix equation; Laplace transform; Option price (search for similar items in EconPapers)
JEL-codes: C02 G13 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:53:y:2015:i:c:p:123-143

DOI: 10.1016/j.jedc.2015.02.007

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