Classification of barrier options
This work provides a practical decision rule for practitioners to simplify barrier option pricing under real-world accuracy constraints.
The paper addresses the problem of determining when a barrier option effectively becomes a simpler option given a specified pricing accuracy, and proposes a probability-based method to find critical stock price values for this classification.
For a given level of accuracy in option prices, the paper considers the problem of deciding when exactly, as one or more of the pricing parameters change, a barrier option degenerates into a simpler type of option. This problem is meaningful in the real world where option prices are always determined within a certain level of accuracy. The problem is reduced to finding certain critical values of the initial stock price, and this is achieved through a probability-based approach.