A Numerical Method for Discrete Single Barrier Option Pricing with Time-Dependent Parameters

Rahman Farnoosh (), Hamidreza Rezazadeh (), Amirhossein Sobhani () and M. Hossein Beheshti ()
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Rahman Farnoosh: Iran University of Science and Technology
Hamidreza Rezazadeh: Iran University of Science and Technology
Amirhossein Sobhani: Iran University of Science and Technology
M. Hossein Beheshti: Islamic Azad university

Computational Economics, 2016, vol. 48, issue 1, No 6, 145 pages

Abstract: Abstract In this article, the researchers obtained a recursive formula for the price of discrete single barrier option based on the Black–Scholes framework in which drift, dividend yield and volatility assumed as deterministic functions of time. With some general transformations, the partial differential equations (PDEs) corresponding to option value problem, in each monitoring time interval, were converted into well-known Black–Scholes PDE with constant coefficients. Finally, an innovative numerical approach was proposed to utilize the obtained recursive formula efficiently. Despite some claims, it has considerably low computational cost and could be competitive with the other introduced method. In addition, one advantage of this method, is that the Greeks of the contracts were also calculated.

Keywords: Barrier option; Black–Scholes framework; Discrete monitoring; Time-dependent parameters; Greeks (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s10614-015-9506-7

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