Valuing American strangle options via double barrier first-touch digitals

초록

This paper generalizes explicit pricing formulas for double barrier first-touch digitals and develops an approximating method for American strangle option prices. By employing a double barrier to emulate the optimal upper/lower exercise boundaries of American strangles, our approach aims to identify the optimal double barrier that maximizes the value of the portfolio of first-touch digitals and knock-out options, whose individual payoffs depend on the first-hitting time of the underlying asset price. The optimized portfolio price provides a viable approximation even with only a few barrier steps. Numerical experiments confirm the effectiveness of our approximation strategy.

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