Barrier option valuation with binomial model

1. Barrier option valuation with binomial model • Binomial model • Barrier options • Formulas • Application

2. Barrier options Down-and-out Down-and-in Up-and-out Up-and-in

3. Barrier levels • Down-and-out: H < K • Down-and-in: H < K • Up-and-out: H > K • Up-and-in: H > K

4. Binomial Model • Proposed by cox, Ross and Rubinstein in 1979 • Used for valuation of options. • Its flexible, intuitive, base on random walks theory. • Concept, price can go up or down during a single period of time. • Movement of the price of underlying asset follow a binomial distrbution.

7. Formulas • Up factor • Down factor • Riskless probability • Up-and-inUp-and-out (Call option) • Down-and-in Down-and-out (Put option)

8. Binomial tree

9. Thank you!