Abstract
This paper proposes a pricing methodology for barrier options using integral kernels, which is completely different from the standard approach that postulates a model.Our methodology is more attractive when the model of the standard approach can not be calibrated to the market price of a no-touch option, the most liquid exotic option in the the foreign exchange options market.Prices by our methodology are surely in the pricing bounds which are model-independently derived from super-/sub-replication using plain-vanilla options and no-touch options, while the mis-calibrated model may produce prices out of the bounds. This is demonstrated by the numerical examples.
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