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Enron Mail |
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
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