Path Integral Method for Pricing Proportional Step Double-Barrier Option with Time Dependent Parameters

• URL: http://arxiv.org/abs/2302.07631v1
• Date: Wed, 15 Feb 2023 12:53:34 GMT
• Title: Path Integral Method for Pricing Proportional Step Double-Barrier Option with Time Dependent Parameters
• Authors: Qi Chen and Chao Guo
• Abstract summary: Path integral method in quantum mechanics provides a new thinking for barrier option pricing. For proportional double-barrier step (PDBS) options, the option price changing process is analogous to a particle moving in a finite symmetric square potential well.
• Score: 7.891031556378682
• License: http://creativecommons.org/licenses/by/4.0/
• Abstract: Path integral method in quantum mechanics provides a new thinking for barrier option pricing. For proportional double-barrier step (PDBS) options, the option price changing process is analogous to a particle moving in a finite symmetric square potential well. We have derived the pricing kernel of PDBS options with time dependent interest rate and volatility. Numerical results of option price as a function of underlying asset price are shown as well. Path integral method can be easily generalized to the pricing of PDBS options with curved boundaries.

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