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Pricing external barrier options in a regime-switching model
- Authors
- Kim, Jerim; Kim, Jeongsim; Yoo, Hyun Joo; Kim, Bara
- Issue Date
- 4월-2015
- Publisher
- ELSEVIER
- Keywords
- External barrier option; Regime-switching; First passage time; Sylvester matrix equation; Laplace transform; Option price
- Citation
- JOURNAL OF ECONOMIC DYNAMICS & CONTROL, v.53, pp.123 - 143
- Indexed
- SSCI
SCOPUS
- Journal Title
- JOURNAL OF ECONOMIC DYNAMICS & CONTROL
- Volume
- 53
- Start Page
- 123
- End Page
- 143
- ISSN
- 0165-1889
- Abstract
- External barrier options are two-asset options where the payoff is defined on one asset and the barrier is defined on another asset. In this paper, we derive the Laplace transforms of the prices and deltas for the external single and double barrier options where the underlying asset prices follow a regime-switching model with finite regimes. The derivation is made possible because we can obtain the joint Laplace transform of the first passage time of one asset value and the value of the other asset. Numerical inversion of the Laplace transforms is used to calculate the prices of external barrier options. (C) 2015 Elsevier B.V. All rights reserved.
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