Reflection Principle.

axa
b
I
J A Terminal time is distribution
a derive bag 21
trick
>
Prob ( max Yt) 7,0) = 2. Prob c Y CT), a)- Probla
)
in discreet time.

(2) This
Prob (TC127,4)
is comited
- its mirror. cocented too
therefore 2 Prob (YCP) 32)
Prob c X(T) = a) counted twice.
double count those
hit a at to return to a at T,
therefore, final probability = 2P 14(73") - Probl Y) =a)
denviation. Prob (max(42)<a) + Prob (max (47)39)=1
use one probability to delive another probability
from may problem to minirim problem.

Prob( min (t) sa ) = 2• Prob (TCT) a)- Prob CYCT) a)

In the more realistic sitration to the barrier option pay off
two levels: az b.
Prob ( Y(4)7 a, min Y)=6) , T=4 another question
ProblYcTa, Yt)76)
g
an aba /
a
= bt b-a

set Q=0 |
this is a
What we need 4
b=4 l
y to count ®),
K
I mate
Prob = Prob ( YCT) { 2b-9)
I
Fate takizm). Ja
Prob= Prob(Y(T)<b) - Prob (TCT){ 26-9)
Hariz
Prob= Prob[Y(T) 7 26-d]
continous time example.
(Zoro za >b.
Prob(2CT) > a, min12(+1) 76)
= Prob( 2CT) >a)- Prob (2 (7)xa, min (27)56))
Prob[{(7)7a, min (&(t)<b]= Prob(27)<aba!

ų
9
--
12h-a
Standaze.
Lot |
26-a
A Dista
with drift the adjusted will be resou
o
Z~(MT, 0)
Prob (Z(T)>)
(8)xa) - Naca )
"Studanze
Prob. (ZCT)
2

5 26-a).
bogel
-
∞
Application:
dS= u Sdt +=SdZ
x= lg
x lognormal distibution
Prob (min 514)3H) dues i
=- Prob (St PH, min SCPH)
=Prob (517H)- Pob1577H, min Sel<H) |
S()=Soela
+2oTV
hit just at
very last

Het
moment
xalog = (1-7)+£WY
X is my normally distributed
(S) my lognormally distributed
I
a prob( ST{H)+ Prob(SH m (5)
Spasoet soet <H
e o *<log (3)
127 D
22
Tarifleri
nap 47
ut+%;<loge
oWT <lo t ut
WY</logata)
normalize
"T<lgt at
i FFBS formula na
deriviation 4
> Prob(SCT)<H)
X

=1-N(logatas
of
X=-X2
NXI) = NC-X2)
A
xlo
Coil
SCICH
seth
exz
x<logt Incrat =
tal dx=utt odz 7
(* = 4T + W
31- N(X2)
In (F)-af
%T.
5 notation ana
i
na
*
normal distribution in deiliation
mean UT
varience of stochastic equation
Xo=0
XT = aT +
dx= No dt toopF dZ ,
Stoclastic 14 tion in
specification
TFR
Es solution in 314

this is the variable 2 133 A FRV In Distributions,

First Passage Time.
- 1 , 1 IndRVE
density function fet)
= Prob ( max (Zi) 76 ) = a Prob (Z (7)76)
Probl76 Ft)
a l at Sezadx
describe this went
bis the banier level
a
F So etody
hit baier before matrite
ty T
Mau(x)=0 mean(4)zo
let X YE
Var(x) = Varly)= varlf)=(
x360)
yo of 70)
tado, t
yn No,l)
- Prob(765) Ja Se
de = density fiention a
Brandom vorable.
whats the purpose of
finding 1st passage bine?
What's the purpose of
finding such a density
- {y2 function?
g.
TASET density function que
132 first pass time = loia
probability
no
dz