Barrier options in three dimensions

Marcos Escobar Anel (), Sebastian Ferrando and Xianzhang Wen

International Journal of Financial Markets and Derivatives, 2014, vol. 3, issue 3, 260-292

Abstract: The paper provides closed-form expressions for the price of several barrier type derivatives with a three-dimensional geometric Wiener process as underlying. These solutions are found for special correlation matrices and are given by linear combinations of three-dimensional Gaussian cumulative distributions. The method of images is used as a key technique to establish the solutions. Two cases are described extending the results to a wider set of correlation matrices, one case deals with random variances and the other case with random correlations.

Keywords: method of images; 3D Wiener process; distribution of minimum; maximum; financial derivatives; barrier options; random variances; random correlation. (search for similar items in EconPapers)
Date: 2014
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