The Mathematical Institute, University of Oxford, Eprints Archive

A matched asymptotic expansions approach to continuity corrections for discretely sampled options. Part 1: barrier options.

Howison, Sam and Steinberg, Mario (2005) A matched asymptotic expansions approach to continuity corrections for discretely sampled options. Part 1: barrier options. Applied Mathematical Finance . (In Press)

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Abstract

We discuss the `continuity correction' that should be applied to relate the prices of discretely sampled barrier options and their continuously-sampled equivalents. Using a matched asymptotic expansions approach we show that the correction of Broadie, Glasserman & Kou (Mathematical Finance 7, 325 (1997)) can be applied in a very wide variety of cases. We calculate the correction to higher order in terms of the expansion parameter (the scaled time between resets) and we show how to apply the correction in jump-diffusion and local volatility models.

Item Type:Article
Uncontrolled Keywords:Barrier option, discrete sampling, continuity correction.
Subjects:D - G > Game theory, mathematical finance, economics, social and behavioral sciences
Research Groups:Mathematical and Computational Finance Group
ID Code:225
Deposited By:Sam Howison
Deposited On:20 Apr 2006
Last Modified:20 Jul 2009 14:19

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