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Here is to continue the above answer of Emcor to make it more explicit. Note that the fact given in the question should instead be \begin{align*} P(\inf \big\{t \in [0, T], B_t +ct = a \big\} \geq T) = 1- \Phi\Big(\frac{a-cT}{\sqrt{T}}\Big) + e^{2ac}\Phi\Big(\frac{-a-cT}{\sqrt{T}}\Big). \end{align*} Then, for $0<t_0\leq T$, \begin{align*} P(\tau \leq ...


If you assume the payoff is paid at time T, you just have to compute P(tau < T). In this case, you have everything you need to do it. If the payoff is paid at time tau, you need to compute the density of the stopping time.


$S_t$ is already under $Q$ (riskfree drift), so you not need to change the measure here. Note that $c:=\left(\frac{r}{\sigma}-\frac{1}{2}\sigma\right)$ and $E\left(1_A\right)=P(A)$. So one computes the European option price as the discounted payoff expectation: $$C=e^{-rT}E\left(1_{\tau\leq T}\right)=e^{-rT}P(\tau\leq T).$$ The option price equals the ...

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