Valuation of Barrier Options in a Black-Scholes Setup with Jump Risk

Dietmar P. J. Leisen ()
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Dietmar P. J. Leisen: Stanford University and University of Bonn

No 133, Computing in Economics and Finance 1999 from Society for Computational Economics

Abstract: This paper discusses the pitfalls in the pricing of barrier options using approximations of the underlying continuous processes via discrete lattice models. These problems are studied first in a Black-Scholes model. Improvements result from a trinomial model and a further modified model where price changes occur at the jump times of a Poisson process. After the numerical difficulties have been resolved in the Black-Scholes models, unpredictable discontinuous price movements are incorporated.

Date: 1999-03-01
New Economics Papers: this item is included in nep-fin
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