#TITLE_ALTERNATIVE#

• Main Author: HAMID (NIM 10104103), CHAIDIR
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/10123
• Institution: Institut Teknologi Bandung

Barrier options are one of many types of exotic options which are often traded in the derivative market. One popular kind of barrier option is the European barrier option. Merton's formula can be used to price European barrier options, but many people also use other pricing methods like the lattice method. This lattice method is not just more intuitive, but also more flexible and easy to use for hedging purposes. Standard binomial and trinomial method are less good on pricing barrier options, so some modifications were made given by Boyle-Lau's binomial method , Ritchken's trinomial method, and adaptive mesh model. Boyle-Lau pointed out the selection of the correct number of periods to make the stock prices on any layer lied nearly to the barrier, Ritchken stressed to choosing of the correct stretch parameter to force the stock prices on any layer similar to barrier, and adaptive mesh tries to give a higher resolution to the region that contributes much toward errors. Adaptive mesh model is also able to resolve near-barrier problems that could not be done by Boyle-Lau's binomial and Ritchken's trinomial method. An other kind of barrier option, but not traded in the regular market, is the Employee Stock Option (ESO) which is a kind of incentive given to the employees by the firm to enhance their performance. The use of Black-Scholes's formula to approximate the fair value of such option is not relevant anymore because of the discrepancy of the assumptions. Alternatively, we will use a lattice method which is not only good by convergence, but also on computational timing to price the ESO. <br />