Two asset-barrier option under stochastic volatility

Barbara Goetz, Marcos Escobar Anel () and Rudi Zagst

Applied Mathematical Finance, 2017, vol. 24, issue 6, 520-546

Abstract: Financial products which depend on hitting times for two underlying assets have become very popular in the last decade. Three common examples are double-digital barrier options, two-asset barrier spread options and double lookback options. Analytical expressions for the joint distribution of the endpoints and the maximum and/or minimum values of two assets are essential in order to obtain quasi-closed form solutions for the price of these derivatives. Earlier authors derived quasi-closed form pricing expressions in the context of constant volatility and correlation. More recently solutions were provided in the presence of a common stochastic volatility factor but with restricted correlations due to the use of a method of images. In this article, we generalize this finding by allowing any value for the correlation. In this context, we derive closed-form expressions for some two-asset barrier options.

Date: 2017
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DOI: 10.1080/1350486X.2017.1419910

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