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The Journal of Derivatives

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Primary Article

Pricing Discretely Monitored Barrier Options by a Markov Chain

Jin-Chuan Duan, Evan Dudley, Geneviève Gauthier and Jean-Guy Simonato
The Journal of Derivatives Summer 2003, 10 (4) 9-31; DOI: https://doi.org/10.3905/jod.2003.319203
Jin-Chuan Duan
Professor and the Manulife Chair in Financial Services, Joseph L. Rotman School of Management, at the University of Toronto in Ontario, Canada.
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  • For correspondence: jcduan@rotman.utoronto.ca
Evan Dudley
A Ph.D. candidate at the Simon Graduate School of Business Administration, University of Rochester in Rochester, NY.
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Geneviève Gauthier
An associate professor, HEC Montreal, in Canada.
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Jean-Guy Simonato
An associate professor, HEC Montreal, in Canada.
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Abstract

Barrier options have become commonplace in the option market, and a variety of other financial contracts may also be thought of in terms of barrier options. But the existence of a price barrier can significantly complicate the option valuation problem when volatility is time-varying, or the barrier itself moves over time, or the barrier is only monitored at discrete intervals. In this article, Duan et al. present a new Markov chain technology for pricing barrier options that readily handles all of these problems. Out-and-in options can be valued within their framework even when volatility follows a GARCH process and a discretely monitored time-varying barrier is present.

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The Journal of Derivatives
Vol. 10, Issue 4
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Pricing Discretely Monitored Barrier Options by a Markov Chain
Jin-Chuan Duan, Evan Dudley, Geneviève Gauthier, Jean-Guy Simonato
The Journal of Derivatives May 2003, 10 (4) 9-31; DOI: 10.3905/jod.2003.319203

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Pricing Discretely Monitored Barrier Options by a Markov Chain
Jin-Chuan Duan, Evan Dudley, Geneviève Gauthier, Jean-Guy Simonato
The Journal of Derivatives May 2003, 10 (4) 9-31; DOI: 10.3905/jod.2003.319203
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