Barrier Contingent Claims: Laplace Transforms and Financial Intuition

Finance

IFA Working Paper

1997

Laplace transforms come very handy when asset pricing is pursued via the equivalent maringale measure (EMM) technique. The EMM technique retrieves the asset price by integrating over the possible payoff realizations as well as by integrating over the time at which asset payoffs are promised. The integral nature of Laplace transforms and their well-developed structure allow for an easy and sharp solution of a number of EMM asset pricing problems. LaPlace effectiveness can be appreciated in the case of barrier contingent claims. Firstly, a general intuitive treatment of barrier-stopped consols is offered. Secondly, a new closed-form price for the double barrier option is offered: it meets simple financial intuition and it is numerically superior to the previous closed-form prices.

Institute of Finance and Accounting

FIN 262

IFA Working Paper

No