Pricing Value Difference between Barrier and Vanilla Options with Binomial Pricing Method

Abstract

Abstract: The binomial pricing method was adopted to build a pricing model for the value difference between barrier and vanilla options which are different only in barrier, as well as the impacts of several key factors on the price difference. The outcomes indicate that the value of the barrier option is lower than that of the vanillar option. Moreover, for the downandout call options, the price difference gets bigger with any of the situations which are higher barrier, higher call price, longer maturity, lower underlying asset price, and smaller expected return rate or bigger volatility of the underlying asset price.

Key words: barrier options, value difference pricing model, binomial pricing method

CLC Number:

F 830.9

HU Wen-Wei-1, LI Zhan-2. Pricing Value Difference between Barrier and Vanilla Options with Binomial Pricing Method[J]. Journal of Shanghai Jiaotong University, 2012, 46(05): 825-831.

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