Multi‐asset barrier options and occupation time derivatives

Abstract

A general framework is formulated to price various forms of European style multi‐asset barrier options and occupation time derivatives with one state variable having the barrier feature. Based on the lognormal assumption of asset price processes, the splitting direction technique is developed for deriving the joint density functions of multi‐variate terminal asset prices with provision for single or double barriers on one of the state variables. A systematic procedure is illustrated whereby multi‐asset option price formulas can be deduced in a systematic manner as extensions from those of their one‐asset counterparts. The formulation has been applied successfully to derive the analytic price formulas of multi‐asset options with external two‐sided barriers and sequential barriers, multi‐asset step options and delayed barrier options. The successful numerical implementation of these price formulas is demonstrated.

Corresponding author; e‐mail: [email protected]; fax: [phone]‐1643

Keywords:

• multi‐asset barrier options
• occupation time derivatives
• splitting direction technique

Notes

Corresponding author; e‐mail: [email protected]; fax: [phone]‐1643