CLOSED FORM FORMULAS FOR EXOTIC OPTIONS AND THEIR LIFETIME DISTRIBUTION

Raphael Douady ()

Chapter 6 in Quantitative Analysis in Financial Markets:Collected Papers of the New York University Mathematical Finance Seminar, 1999, pp 177-202 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe first recall the well-known expression of the price of barrier options, and compute double barrier options by the mean of the iterated mirror principle. The formula for double barriers provides an intraday volatility estimator from the information of high-low-close prices. Then we give explicit formulas for the probability distribution function and the expectation of the exit time of single and double barrier options. These formulas allow to price time independent and time dependent rebates. They are also helpful to hedge barrier and double barrier options, when taking into account variations of the term structure of interest rates and of volatility. We also compute the price of rebates of double knock-out options that depend on which barrier is hit first, and of the BOOST, an option which pays the time spent in a corridor. All these formulas are either in closed form or double infinite series which converge like e−αn2.

Date: 1999
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Journal Article: CLOSED FORM FORMULAS FOR EXOTIC OPTIONS AND THEIR LIFETIME DISTRIBUTION (1999)
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