Step Double Barrier Options

Abstract

Barrier options are common in the market and a variety of procedures exist for efficient valuation of the plain vanilla varieties. But simple structures do not fit all investors’ preferences and needs, so more complex barrier options are also regularly traded. An important class is step double barrier contracts, which have barriers both above and below the current market price (the “double” part) that widen or narrow at a predetermined future date (the “step” part). Naturally, the tradition of exotic names for exotic options is applied here, resulting in “hot dogs,” “towers,” “wedding cakes,” “onions” and more. Guillaume takes on the challenge of developing closed-form valuation equations that can be applied to a great variety of such contracts. The results are inherently messy, but worth it, because execution speed is greatly increased.

TOPICS: Options, accounting and ratio analysis, VAR and use of alternative risk measures of trading risk