Pricing multi-step double barrier options by the efficient non-crossing probability

Hangsuck Lee, Hongjun Ha, Byungdoo Kong and Minha Lee

Finance Research Letters, 2023, vol. 54, issue C

Abstract: This paper considers pricing multi-step double barrier options. The non-crossing probability for a multi-step double boundary is vital in valuing the options. We extend an explicit formula for the non-crossing probability using the solutions to the relevant Fokker–Planck equations. The derived formula not only provides a new look at the non-crossing probability but also outperforms the existing probability formula relying on multivariate normal distribution functions in terms of efficiency by avoiding multi-dimensional numerical integrals. We demonstrate the merits of the new expression of the non-crossing probability via numerical experiments and apply it to valuing multi-step double barrier options.

Keywords: Non-crossing probability; Fokker–Planck equation; Multi-step double barrier options (search for similar items in EconPapers)
JEL-codes: G13 G22 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323001459

DOI: 10.1016/j.frl.2023.103772

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