Message-ID: <14056754.1075852415277.JavaMail.evans@thyme> Date: Tue, 17 Apr 2001 16:22:00 -0700 (PDT) From: zimin.lu@enron.com To: john.griffith@enron.com Subject: Re: Barrier opt Cc: stinson.gibner@enron.com, john.arnold@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: stinson.gibner@enron.com, john.arnold@enron.com X-From: Zimin Lu X-To: John Griffith X-cc: Stinson Gibner , John Arnold X-bcc: X-Folder: \JGRIFFIT (Non-Privileged)\Griffith, John\Research X-Origin: GRIFFITH-J X-FileName: JGRIFFIT (Non-Privileged).pst John, For a down and out put, I put the following as an approximation for our understanding purpose. a down and out put with barrier B < strike K is overestimated by A put at struck at K - a put struck at B - (K-B)*digital put strike at B. I ploted the barrier put (blue line) versus the approximation (red line) as function of the barrier. The true barrier option has zero payoff whenever there is a touch down the barrier during the lifetime of the option. Therefore it goes to zero much faster than above approximation when B -> K. See the spreadsheet for more details. Zimin