A Semigroup Expansion for Pricing Barrier Options

<table class="table-group" id="tab1"><tr><td><table class="table"><tr><td class="thead-hr" colspan="4"><hr/></td></tr><tr class="thead"><td align="left">  Strike </td><td align="center"> Benchmark </td><td align="center"> Our approximation (<svg height="16.0716pt" id="M367" style="vertical-align:-3.9935pt" version="1.1" viewbox="-0.0498162 -12.0781 43.4312 16.0716" width="43.4312pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.0135,0,0,-0.0135,0,0)"><path d="M515 96L502 119C471 88 431 62 423 62C416 62 411 70 417 101C440 223 469 341 497 448H486L412 422L380 277C330 188 210 57 152 57C137 57 126 69 139 124L195 366C210 431 205 448 182 448C155 448 89 413 23 350L36 326C73 354 103 376 112 376C118 376 118 365 113 340L61 118C54 90 52 68 52 51C52 0 75 -12 98 -12S151 -3 181 17C242 58 305 119 362 193H364L345 104C323 3 339 -12 359 -12C390 -12 464 35 515 96Z" id="g113-118"></path><glyph.data ascent="3473" descent="-2876" horiz-adv-x="538" vert-adv-y="538"></glyph.data></g><g transform="matrix(.0095,0,0,-0.0095,7.289,-5.984)"><path d="M245 635C92 635 37 457 37 312C37 149 91 -12 244 -12C395 -12 449 166 449 312C449 469 395 635 245 635ZM243 598C332 598 358 454 358 312C358 173 334 26 245 26C158 26 128 174 128 313S152 598 243 598Z" id="g50-49"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g transform="matrix(.0135,0,0,-0.0135,15.451,0)"><path d="M535 230V280H323V490H265V280H52V230H265V-3H323V230H535Z" id="g117-36"></path><glyph.data ascent="3473" descent="-2876" horiz-adv-x="587" vert-adv-y="587"></glyph.data></g><g transform="matrix(.0135,0,0,-0.0135,26.432,0)"><path d="M387 375C387 402 357 448 257 448C172 448 82 404 82 326C82 289 108 255 156 241V239C85 223 23 181 23 116C23 39 89 -12 182 -12C265 -12 336 31 378 91L361 114C320 73 269 47 216 47C157 47 115 82 115 137C115 191 160 219 218 219C243 219 262 218 272 217L304 259L302 266C295 265 281 264 255 264C195 264 163 294 163 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id="g50-49"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g><g transform="matrix(.0095,0,0,-0.0095,38.044,3.944)"><path d="M389 0V32C297 38 291 46 291 118V635C234 613 175 595 109 583V556L161 554C203 552 207 547 207 497V118C207 46 201 38 110 32V0H389Z" id="g50-50"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g></svg>) </td><td align="center"> Barrier Black-Scholes (<svg height="12.2911pt" id="M368" style="vertical-align:-0.2129993pt" version="1.1" viewbox="-0.0498162 -12.0781 12.5499 12.2911" width="12.5499pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.0135,0,0,-0.0135,0,0)"><path d="M515 96L502 119C471 88 431 62 423 62C416 62 411 70 417 101C440 223 469 341 497 448H486L412 422L380 277C330 188 210 57 152 57C137 57 126 69 139 124L195 366C210 431 205 448 182 448C155 448 89 413 23 350L36 326C73 354 103 376 112 376C118 376 118 365 113 340L61 118C54 90 52 68 52 51C52 0 75 -12 98 -12S151 -3 181 17C242 58 305 119 362 193H364L345 104C323 3 339 -12 359 -12C390 -12 464 35 515 96Z" id="g113-118"></path><glyph.data ascent="3473" descent="-2876" horiz-adv-x="538" vert-adv-y="538"></glyph.data></g><g transform="matrix(.0095,0,0,-0.0095,7.289,-5.984)"><path d="M245 635C92 635 37 457 37 312C37 149 91 -12 244 -12C395 -12 449 166 449 312C449 469 395 635 245 635ZM243 598C332 598 358 454 358 312C358 173 334 26 245 26C158 26 128 174 128 313S152 598 243 598Z" id="g50-49"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="487" vert-adv-y="487"></glyph.data></g></svg>) </td></tr><tr><td class="thead-hr" colspan="4"><hr/></td></tr><tr><td align="left"> 100 </td><td align="center"> 3.468 </td><td align="center"> 3.466 (−0.05%) </td><td align="center"> 3.495 (0.80%) </td></tr><tr><td align="left">102 </td><td align="center"> 2.822 </td><td align="center"> 2.822 (0.00%) </td><td align="center"> 2.866 (1.57%) </td></tr><tr><td align="left">105 </td><td align="center"> 1.986 </td><td align="center"> 1.986 (0.01%) </td><td align="center"> 2.052 (3.36%) </td></tr><tr class="table-tr"><td colspan="4"><hr class="tbody-hr"/></td></tr></table></td></tr></table>

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International Journal of Stochastic Analysis

A Semigroup Expansion for Pricing Barrier Options

Table 1