Multiperiod conditional valuation of barrier options with incomplete information

Quantitative Finance, Volume 15, Issue 7, pp1093-1102, 2015

In this paper, we investigate the role of reduced available information on the valuation of single and double barrier options. We present closed-form analytical solutions for barrier options with three different types of information about the underlying: full information arriving continuously, delayed continuous observations and multiple discrete observations. Such information structures are the typical information sets available in liquid markets for mark-to-model valuations, market risk and credit risk mangement. We also consider the case where additional observation noise is layered over the underlying asset price – information set that is common for some investors in unlisted stocks and other illiquid assets.