Continuity correction: on the pricing of discrete double barrier options

Sheng-Feng Luo () and Hsin-Chieh Wong ()
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Sheng-Feng Luo: Chung Yuan Christian University
Hsin-Chieh Wong: National Taipei University

Review of Derivatives Research, 2023, vol. 26, issue 1, No 3, 90 pages

Abstract: Abstract This article deals with the pricing of double-barrier options monitored discretely. A continuity correction method is established to provide an analytical approximation for the price of such discrete options under the Black–Scholes model. We achieve this by applying the smooth-fit principle simultaneously to the two flat boundaries (barriers) associated. The resulting correction form still involves adjustments in the levels of barriers, but the amounts adjusted can be different for different boundaries. More interestingly, the shift for each boundary can also be in different directions, which depends largely on the position of the current level relative to the two boundaries. Numerical examples are provided as well which support our theoretical achievements.

Keywords: Discrete option pricing; Double barrier option; Continuity correction; Principle of smooth fit; Overshoot (search for similar items in EconPapers)
JEL-codes: C02 C63 G13 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11147-022-09193-z

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