English, Article edition: MONOTONICITY IN THE VOLATILITY OF SINGLE-BARRIER OPTION PRICES JONATAN ERIKSSON

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Bookmark: http://trove.nla.gov.au/version/83049
Physical Description
  • article
Language
  • English

Edition details

Title
  • MONOTONICITY IN THE VOLATILITY OF SINGLE-BARRIER OPTION PRICES
Author
  • JONATAN ERIKSSON
Physical Description
  • article
Notes
  • We generalize earlier results on barrier options for puts and calls and log-normal stock processes to general local volatility models and convex contracts. We show that Π⥠0, that Î has a unique sign and that the option price is increasing with the volatility for convex contracts in the following cases:⢠If the risk-free rate of return dominates the dividend rate, then it holds for up-and-out options if the contract function is zero at the barrier and for down-and-in options in general.⢠If the risk-free rate of return is dominated by the dividend rate, then it holds for down-and-out options if the contract function is zero at the barrier and for up-and-in options in general.We apply our results to show that a hedger who misspecifies the volatility using a time-and-level dependent volatility will super-replicate any claim satisfying the above conditions if the misspecified volatility dominates the true (possibly stochastic) volatility almost surely.
  • Barrier option, convexity, volatility, parabolic equation
  • RePEc:wsi:ijtafx:v:09:y:2006:i:06:p:987-996
Language
  • English
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