Valuation of Barrier Options with the Binomial Pricing Model

Abstract

Derivatives are products of different nature which are becoming increasingly common in financial markets. In certain cases, determining the assessment criteria can sometimes be a difficult task. Specifically, this paper focuses on one type of exotic option: the barrier option. This option has to satisfy some conceptual conditions which are specified at the time of its purchase and define its characteristics. In order to analyze this type of option more deeply, in this paper we choose a specific one, the so-called barrier option cap, whose value is going to be derived by the binomial pricing model.

Keywords

• barrier options
• exotic options
• barrier option cap
• binomial model