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Barrier options and their static hedges: simple derivations and extensions

Author: Rolf Poulsen a
Affiliation:   a Department of Applied Mathematics and Statistics, Institute for Mathematical Sciences, University of Copenhagen, DK-2100, Denmark
DOI: 10.1080/14697680600690331
Publication Frequency: 8 issues per year
Published in: journal Quantitative Finance, Volume 6, Issue 4 August 2006 , pages 327 - 335
Formats available: HTML (English) : PDF (English)
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Abstract

We use a reflection result to give simple proofs of (well-known) valuation formulas and static hedge portfolio constructions for zero-rebate single-barrier options in the Black-Scholes model. We then illustrate how to extend the ideas to other model types giving (at least) easy-to-program numerical methods and other option types such as options with rebates, and double-barrier and lookback options.
Keywords: Barrier option; Static hedging
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