Abstract
This paper concerns barrier options of American type where the underlying asset price is monitored for barrier hits during a part of the option’s lifetime. Analytic valuation formulas of the American partial barrier options are provided as the finite sum of bivariate normal distribution functions. This approximation method is based on barrier options along with constant early exercise policies. In addition, numerical results are given to show the accuracy of the approximating price. Our explicit formulas provide a very tight lower bound for the option values, and moreover, this method is superior in speed and its simplicity.
Similar content being viewed by others
References
Barone-Adesi G., Whaley R. (1987) An efficient analytic approximation of American option values. Journal of Finance 42: 301–320
Brennan M. J., Schwartz E. S. (1977) Saving bonds, retractable bonds and callable bonds. Journal of Financial Economics 5: 67–88
Broadie M., Detemple J. (1996) American options valuations: New bounds, approximations and a comparison of existing methods. Review of Financial Studies 9: 1211–1250
Carr P., Jarrow R., Myneni R. (1992) Alternative characterizations of American puts. Mathematical Finance 2: 87–106
Chung S. L., Hung M. W., Wang J. Y. (2010) Tight bounds on American option prices. Journal of Banking & Finance 34: 77–89
Cox J. C., Ross S. A., Rubinstein M. (1979) Option pricing: A simplified approach. Journal of Financial Economics 7: 229–264
Dai M., Kwok Y. K. (2004) Knock-in American options. Journal of Futures Markets 24: 179–192
Figlewski S., Gao B. (1999) The adaptive mesh model: A new approach to efficient option pricing. Journal of Financail Economics 53: 313–351
Gao B., Hunag J., Subrahmanyam M. (2000) The valuation of American options using the decomposition technique. Journal of Economic Dynamic & Control 24: 1783–1827
Geman H., Yor M. (1996) Pricing and hedging double-barrier options: A probabilistic approach. Mathematical Finance 6: 365–378
Geske R., Johnson H. E. (1984) The American put option valued analytically. Journal of Finance 39: 1511–1524
Glasserman P. (2003) Monte carlo methods in financial engineering. Springer-Verlag, New York
Guillaume T. (2003) Window double barrier options. Review of Derivatives Research 6: 47–75
Heynen R. C., Kat H. M. (1994) Partial barrier options. Journal of Financial Engineering 3: 253–274
Huang J., Subrahmanyam M., Yu G. (1996) Pricing and hedging American options: A recursive integration method. Review of Financial Studies 9: 277–300
Ingersoll J. E. Jr. (1998) Approximating American options and other financial contracts using barrier derivatives. Journal of Computational Finance 2: 85–112
Ingersoll J. E. Jr. (2000) Digital contracts: Simple tools for pricing complex derivatives. The Journal of Business 73: 67–88
Jacka S. D. (1991) Optimal stopping and the American put. Mathematical Finance 1: 1–14
Johnson H. E. (1983) An analytic approximation for the American put price. Journal of Financial and Quantitative Analysis 18: 141–148
Ju N. (1998) Pricing an American option by approximating its early exercise boundary as a multipiece exponential function. Review of Financial Studies 11: 627–646
Kim I. J. (1990) The analytic valuation of American options. Review of Financial Studies 3: 547–572
Kunitomo N., Ikeda M. (1992) Pricing options with curved boundaries. Mathematical Finance 2: 275–298
Longstaff F. A., Schwartz E. S. (2001) Valuing American options by simulation: A simple least-squares approach. Review of Financial Studies 14: 113–147
MacMillan L. W. (1986) An analytical approximation for the American put prices. Advances in Futures and Options Research 1: 119–139
Merton R. C. (1973) Theory of rational option pricing. Bell Journal of Economics and Management Science 4: 141–183
Parkinson M. (1977) Option pricing: The American put. Journal of Business 50: 21–36
Rich D. (1994) The mathematical foundations of barrier option pricing theory. Advances in Futures and Options Research 7: 267–312
Rubinstein M., Reiner E. (1991) Breaking down the barriers. Risk 4: 28–35
Sullivan M. A. (2000) Valuing American put options using Gaussian quadrature. The Review of Financial Studies 13(Spring): 75–94
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Jun, D., Ku, H. Valuation of American partial barrier options. Rev Deriv Res 16, 167–191 (2013). https://doi.org/10.1007/s11147-012-9081-1
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11147-012-9081-1