Skip to main content

Main menu

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JOD
    • Editorial Board
    • Published Ahead of Print (PAP)
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

User menu

  • Sample our Content
  • Request a Demo
  • Log in

Search

  • ADVANCED SEARCH: Discover more content by journal, author or time frame
The Journal of Derivatives
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Sample our Content
  • Request a Demo
  • Log in
The Journal of Derivatives

The Journal of Derivatives

ADVANCED SEARCH: Discover more content by journal, author or time frame

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JOD
    • Editorial Board
    • Published Ahead of Print (PAP)
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

Barrier Option Pricing Using Adjusted Transition Probabilities

Giovanni Barone-Adesi, Nicola Fusari and John Theal
The Journal of Derivatives Winter 2008, 16 (2) 36-53; DOI: https://doi.org/10.3905/JOD.2008.16.2.036
Giovanni Barone-Adesi
is a professor at the Swiss Finance Institute at the University of Lugano in Lugano, Switzerland.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: baroneg@lu.unisi.ch
Nicola Fusari
is a PhD student at the Swiss Finance Institute at the University of Lugano in Lugano, Switzerland.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: nicola.fusari@lu.unisi.ch
John Theal
is a PhD student at the Swiss Finance Institute at the University of Lugano in Lugano, Switzerland.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: john.theal@lu.unisi.ch
  • Article
  • Info & Metrics
  • PDF (Subscribers Only)
Loading

Click to login and read the full article.

Don’t have access? Click here to request a demo 

Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600

Abstract

While closed-form valuation formulas like Black–Scholes are the Holy Grail of options modeling, numerical approximation in a lattice model is the workhorse of real world pricing for exotics, such barrier options. But the workhorse has to work harder for some options than for others, particularly when the price of the underlying starts off near the barrier. Pricing errors are relatively large when the barrier falls in the middle between two price nodes. A variety of techniques has been advanced in the literature to mitigate the problem for special cases, but they are easily foiled by multiple, nonlinear, or discontinuous barriers. This article deals with the problem in a more systematic fashion and offers a general solution. The trouble with standard lattice models is that the total probability of passing from one node near the barrier, but not beyond it, to another such node in the next time step includes some paths that would breach the barrier along the way. Barone-Adesi, Fusari, and Theal show how performance can be greatly improved by adjusting for those paths.

TOPICS: Options, statistical methods

  • © 2008 Pageant Media Ltd
View Full Text

Don’t have access? Click here to request a demo

Alternatively, Call a member of the team to discuss membership options

US and Overseas: +1 646-931-9045

UK: 0207 139 1600

Log in using your username and password

Forgot your user name or password?
PreviousNext
Back to top

Explore our content to discover more relevant research

  • By topic
  • Across journals
  • From the experts
  • Monthly highlights
  • Special collections

In this issue

The Journal of Derivatives
Vol. 16, Issue 2
Winter 2008
  • Table of Contents
  • Index by author
Print
Download PDF
Article Alerts
Sign In to Email Alerts with your Email Address
Email Article

Thank you for your interest in spreading the word on The Journal of Derivatives.

NOTE: We only request your email address so that the person you are recommending the page to knows that you wanted them to see it, and that it is not junk mail. We do not capture any email address.

Enter multiple addresses on separate lines or separate them with commas.
Barrier Option Pricing Using Adjusted Transition Probabilities
(Your Name) has sent you a message from The Journal of Derivatives
(Your Name) thought you would like to see the The Journal of Derivatives web site.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Citation Tools
Barrier Option Pricing Using Adjusted Transition Probabilities
Giovanni Barone-Adesi, Nicola Fusari, John Theal
The Journal of Derivatives Nov 2008, 16 (2) 36-53; DOI: 10.3905/JOD.2008.16.2.036

Citation Manager Formats

  • BibTeX
  • Bookends
  • EasyBib
  • EndNote (tagged)
  • EndNote 8 (xml)
  • Medlars
  • Mendeley
  • Papers
  • RefWorks Tagged
  • Ref Manager
  • RIS
  • Zotero
Save To My Folders
Share
Barrier Option Pricing Using Adjusted Transition Probabilities
Giovanni Barone-Adesi, Nicola Fusari, John Theal
The Journal of Derivatives Nov 2008, 16 (2) 36-53; DOI: 10.3905/JOD.2008.16.2.036
del.icio.us logo Digg logo Reddit logo Twitter logo Facebook logo Google logo LinkedIn logo Mendeley logo
Tweet Widget Facebook Like LinkedIn logo

Jump to section

  • Article
    • Abstract
    • PRICING USING A TRINOMIAL LATTICE
    • THE PROBABILITY-ADJUSTED TRINOMIAL TREE MODEL FOR AN OPTION WITH A LINEAR TIME-VARYING BARRIER
    • OPTIONS WITH A SINGLE LINEAR TIME-VARYING BARRIER
    • OPTIONS WITH TWO LINEAR TIME-DEPENDENT BARRIERS
    • OPTIONS WITH EXPONENTIAL BARRIERS
    • APPLICATION TO BERMUDA OPTIONS
    • NUMERICAL PERFORMANCE
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

Similar Articles

Cited By...

  • Analytical Valuation of Exotic Double Barrier Options
  • Google Scholar
LONDON
One London Wall, London, EC2Y 5EA
United Kingdom
+44 207 139 1600
 
NEW YORK
41 Madison Avenue, New York, NY 10010
USA
+1 646 931 9045
pm-research@pageantmedia.com
 

Stay Connected

  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

MORE FROM PMR

  • Home
  • Awards
  • Investment Guides
  • Videos
  • About PMR

INFORMATION FOR

  • Academics
  • Agents
  • Authors
  • Content Usage Terms

GET INVOLVED

  • Advertise
  • Publish
  • Article Licensing
  • Contact Us
  • Subscribe Now
  • Log In
  • Update your profile
  • Give us your feedback

© 2022 Pageant Media Ltd | All Rights Reserved | ISSN: 1074-1240 | E-ISSN: 2168-8524

  • Site Map
  • Terms & Conditions
  • Privacy Policy
  • Cookies