A Distribution of Terminal Time Value and Running Maximum of Two-Dimensional Brownian Motion with an Application to Barrier Option

  • Published : 2003.10.31

Abstract

This presentation derives a distribution function of the terminal value and running maximum of two-dimensional Brownian motion {X(t) = (X$_1$(t), X$_2$(T))', t > 0}. One random variable of the joint distribution is the terminal time value of the Brownian motion {X$_1$(t), t > 0}. The other random variable is the partial-time running maximum of the Brownian motion {X$_2$(t), t > 0}. With this distribution function, this presentation also derives an explicit pricing formula for a barrier option whose monitoring period of the option starts at an arbitrary date and ends at another arbitrary date before maturity.

Keywords