hard · Quantitative Finance derivatives
In the Black-Scholes-Merton framework, a Down-and-Out call is priced by subtracting a correction term from the vanilla call price. If the current spot is S_0 and the barrier is H < S_0, the correction term involves a vanilla call priced at a 'reflected' spot price S'_0.
What is the formula for S'_0?
- S'_0 = 2H - S_0
- S'_0 = √(H · S_0)
- S'_0 = (S_0^2)/(H)
- S'_0 = (H^2)/(S_0)
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