Communications of the Korean Mathematical Society (대한수학회논문집)

Korean Mathematical Society (대한수학회)
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DISCOUNT BARRIER OPTION PRICING WITH A STOCHASTIC INTEREST RATE: MELLIN TRANSFORM TECHNIQUES AND METHOD OF IMAGES

  • Jeon, Junkee (Department of Mathematical Sciences Seoul National University) ;
  • Yoon, Ji-Hun (Department of Mathematics Pusan National University)
  • Received : 2017.02.22
  • Accepted : 2017.05.19
  • Published : 2018.01.31
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Abstract

In finance, barrier options are options contracts with a payoff that depends on whether the price of the underlying asset hits a predetermined barrier level during the option's lifetime. Based on exotic options and random fluctuations of interest rates in the marketplace, we consider discount barrier options with a stochastic interest rate driven by the Hull-White process. This paper derives the closed-form solutions of the discount barrier option and the discount double barrier option using Mellin transform methods and the PDE (partial differential equation) method of images.

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References

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