SFB 303 Discussion Paper No. B - 446

Author: Leisen, Dietmar P.J.
Title: Valuation of Barrier Options in a Black-Scholes Setup with Jump Risk
Abstract: This paper discusses the pitfalls in the pricing of barrier options a pproximations of the underlying continuous processes via discrete lattice models . These problems are studied first in a Black-Scholes model. Improvements result from a trinomial model and a further modified model where price changes occur at the jump times of a Poisson process. After the numerical difficulties have be en resolved in the Black-Scholes model, unpredictable discontinuous price movem ents are incorporated.
Keywords: binomial model, option valuation, lattice--approach, barrier option
JEL-Classification-Number: C63, G12, G13G
Creation-Date: January 1999
URL: ../1999/b/bonnsfb446.pdf

SFB 303 Homepage

21.01.1999, Webmaster