Step double barrier options

Tristan Guillaume (1)

1 THEMA - Théorie économique, modélisation et applications

Double barrier options have been traded for a long time in the markets and they are embedded in a variety of popular structured products. However, in their standard form, they lack flexibility inasmuch as they feature a constant barrier level during the entire option life. Step double barrier options overcome this limitation by allowing investors to set the knock-out or knock-in levels they want at the time of their choosing rather than by imposing an arbitrary mathematical form upon the time-varying double barrier. Although step double barrier options are actively traded, no analytical formula is known for their valuation and hedging. In this paper, not only regular step double barrier options are analytically valued, but also more exotic contracts combining periods with and without active barriers as well as step double barrier options written on several assets. Financial properties of these instruments are discussed in comparison with other existing contracts.

Mots clés: double barrier option; step barrier

Domaines: Economies et finances; Pricing [q-fin.PR]

Tristan Guillaume. Step double barrier options. Journal of Derivatives, 2010, 18 (1), pp.59-80. ⟨hal-00924266⟩