An analytic expansion method for the valuation of double-barrier options under a stochastic volatility model

In this paper, we study a double-barrier option with a stochastic volatility model whose volatility is driven by a fast mean-reverting process, where the option's payoff is extinguished as the underlying asset crosses one of two barriers. By using an asymptotic analysis and Mellin transform techniques, we derive semi-analytic option pricing formulas with the sum of a leading-order term and a correction-order term, and then the accuracy of the first approximation price of the double-barrier option is verified by using Monte Carlo simulation. Moreover, we analyze the impact of stochastic volatility on the double-barrier option prices. Finally, we demonstrate that our results enhance the existing double-barrier option price structures in view of flexibility and applicability through the market price of volatility risk.