Please use this identifier to cite or link to this item:
Suchanecki, Michael
Year of Publication: 
Series/Report no.: 
Bonn econ discussion papers 2004,27
In this paper, an alternative approach to pricing barrier options is presented that relies on the use of the first hitting time density to the barrier. The lateral Chapman-Kolmogorov relation is used as a major tool in order to determine option prices. It turns out that this approach allows for pricing barrier options with more general payoffs and with general continuous Markovian stochastic processes as underlying (at least numerically). As an illustrative example, a simple down-and-in call option is considered and its well-known closed form pricing formula is obtained.
Barrier options
first passage time density
first hitting time density
lateral Chapman-Kolmogorov relation
Document Type: 
Working Paper

Files in This Item:

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.