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A matched asymptotic expansions approach to continuity corrections for discretely sampled options. Part 1: barrier options.

Abstract:

We discuss the `continuity correction' that should be applied to relate the prices of discretely sampled barrier options and their continuously-sampled equivalents. Using a matched asymptotic expansions approach we show that the correction of Broadie, Glasserman & Kou (Mathematical Finance 7, 325 (1997)) can be applied in a very wide variety of cases. We calculate the correction to higher order in terms of the expansion parameter (the scaled time between resets) and we show how to apply ...

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Publication date:
2005-01-01
URN:
uuid:5a100743-40a7-4ff8-a607-354bae154cc0
Local pid:
oai:eprints.maths.ox.ac.uk:225

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