The pricing and static hedging of multi-step double barrier options

Hangsuck Lee, Bangwon Ko and Minha Lee

Finance Research Letters, 2023, vol. 55, issue PA

Abstract: As a sequel to Lee et al. (2022b), this paper explores the pricing of multi-step double barrier options with arbitrary European-type payoffs from a static hedging perspective. Using the reflection principle of Brownian motion, we develop how to construct an exact static hedging portfolio consisting of simple discrete barrier options under the Black–Scholes model. This equivalent conversion from continuous monitoring to discrete ones provides an efficient way of evaluating multi-step double barrier options, while overcoming the drawbacks of dynamic hedging. We illustrate our result with numerical examples, and extend it to other asset price dynamics such as jump diffusion.

Keywords: Black–Scholes option price; Jump diffusion; Multi-step double barrier option; Static hedging (search for similar items in EconPapers)
JEL-codes: G13 G22 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002623

DOI: 10.1016/j.frl.2023.103890

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