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An actuarial approach to pricing barrier options

Abstract

We show that two key concepts in actuarial science, Esscher transform and adjustment coefficient, together can provide an efficient method for pricing certain exotic options, known as barrier options. The stock price process is assumed to be a geometric Brownian motion.

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Acknowledgements

Elias S. W. Shiu gratefully acknowledges the support from the Principal Financial Group and Society of Actuaries’ Center of Actuarial Excellence Research Grant. Jun Yang is thankful for the Taylor Award in Actuarial Stochastics.

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Correspondence to Elias S. W. Shiu.

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Gerber, H.U., Shiu, E.S.W. & Yang, J. An actuarial approach to pricing barrier options. Eur. Actuar. J. 11, 333–339 (2021). https://doi.org/10.1007/s13385-021-00266-1

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Keywords

  • Esscher transform
  • Exponential tilting
  • Adjustment coefficient
  • Barrier options
  • Black–Scholes option pricing
  • Adjusted payoff