Message-ID: <11589056.1075849678729.JavaMail.evans@thyme>
Date: Tue, 17 Apr 2001 06:22:00 -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: \John_Griffith_Nov2001\Notes Folders\Research
X-Origin: GRIFFITH-J
X-FileName: jgriffit.nsf

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