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The valuation of American barrier options using the decomposition technique

✍ Scribed by Bin Gao; Jing-zhi Huang; Marti Subrahmanyam

Publisher: Elsevier Science
Year: 2000
Tongue: English
Weight: 323 KB
Volume: 24
Category: Article
ISSN: 0165-1889
DOI: 10.1016/s0165-1889(99)00093-7

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✦ Synopsis

In this paper, we propose an alternative approach for pricing and hedging American barrier options. Speci"cally, we obtain an analytic representation for the value and hedge parameters of barrier options, using the decomposition technique of separating the European option value from the early exercise premium. This allows us to identify some new put-call &symmetry' relations and the homogeneity in price parameters of the optimal exercise boundary. These properties can be utilized to increase the computational e$ciency of our method in pricing and hedging American options. Our implementation of the obtained solution indicates that the proposed approach is both e$cient and accurate in computing option values and option hedge parameters. Our numerical results also demonstrate that the approach dominates the existing lattice methods in both accuracy and e$ciency. In particular, the method is free of the di$culty that existing

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