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Barrier option pricing using adjusted transition probabilities

Barone-Adesi, Giovanni ; Fusari, Nicola ; Theal, John

In: The journal of derivatives, 2008, vol. 16, no. 2, p. 36-53

In the existing literature on barrier options much effort has been exerted to ensure convergence through placing the barrier in close proximity to, or directly onto, the nodes of the tree lattice. For a variety of barrier option types we show that such a procedure may not be a necessary prerequisite to achieving accurate option price approximations. Using the Kamrad and Ritchken (1991)...