Baseball Option is a contract promising to pay a regular, European option at expiration. However, the promise is withdrawn after the knockout barrier has been touched by the underlying price for the n-th time. Such barrier breach is called the “knockout event”. In the event of knockout the baseball option may still pay a fixed rebate. The knockout barrier may be tested either continuously, throughout the life of the instrument, or on a small subset of observation dates.
Baseball option is closely related to knockout option and is typically priced using the underlying dynamics calibrated to the liquid knockout market.
BASEBALL OPTION REFERENCES
Bouzoubaa, M. (2010). Exotic Options and Hybrids: A Guide to Structuring, Pricing and Trading. Wiley.
de Weert, F. (2008). Exotic Options Trading. Wiley.
Lipton, A. (2001). Mathematical Methods for Foreign Exchange: A Financial Engineer's Approach. World Scientific.
Nelken, I., ed (1996). The Handbook of Exotic Options: Instruments, Analysis and Applications. McGraw-Hill.
Clark, I. J. (2011). Foreign Exchange Option Pricing: A Practitioner's Guide. Wiley.
Heston, S. L. (1993). A Closed-Form Solution for Options with Stochastic Volatility with Application to Bond and Currency Options. The Review of Financial Studies 6, 327-343.
Carr, P., & Liuren W. (2007). Stochastic Skew in Currency Options. Journal of Financial Economics 86, 213-247.
Broadie, M., Glasserman, P. & Kou, S. G. (1999). Connecting discrete and continuous path-dependent options. Finance and Stochastics 3, 55-82.
Gatheral, J. (2006). The Volatility Surface. John Wiley & Sons, New Jersey.
Taleb, N. (1997). Dynamic Hedging: Managing Vanilla and Exotic Options. Wiley Finance, New York.
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