Pricing of Discretely Monitored Barrier Options - Improvement of an Approximation Formula
(2014) In Master's Theses in Mathematical Sciences FMA820 20141Mathematics (Faculty of Engineering)
- Abstract
- There are many different methods for pricing discretely monitored barrier options. There is a trade-off, however, between speed and accuracy. The players on the financial markets would of course ideally want a method which is both exact and returns a price instantaneously.
In this thesis we start from a fast, but on the other hand somewhat less accurate, approximation formula. It will be referred to as the 0.5826-approximation, and was introduced in 1997 by Broadie,Glasserman and Kou [1]. It is one of the option pricing formulas currently used by SunGard. The idea of the 0.5826-approximation is to use the analytical pricing formula for the corresponding continuously monitored barrier option, and to use an adjusted barrier in that formula... (More) - There are many different methods for pricing discretely monitored barrier options. There is a trade-off, however, between speed and accuracy. The players on the financial markets would of course ideally want a method which is both exact and returns a price instantaneously.
In this thesis we start from a fast, but on the other hand somewhat less accurate, approximation formula. It will be referred to as the 0.5826-approximation, and was introduced in 1997 by Broadie,Glasserman and Kou [1]. It is one of the option pricing formulas currently used by SunGard. The idea of the 0.5826-approximation is to use the analytical pricing formula for the corresponding continuously monitored barrier option, and to use an adjusted barrier in that formula to account for the
decreased probability of a barrier hit.
The purpose of this thesis is to improve the 0.5826-approximation for down-and-out call options with barrier less than or equal to the strike, and in particular to mitigate two problems. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/4462110
- author
- Andersson, Filip LU and Ögren, Mikael LU
- supervisor
- organization
- course
- FMA820 20141
- year
- 2014
- type
- H2 - Master's Degree (Two Years)
- subject
- keywords
- Barrier Option, Approximation Formula, Discretely Monitored
- publication/series
- Master's Theses in Mathematical Sciences
- report number
- LUTFMA-3061-2014
- ISSN
- 1404-6342
- other publication id
- 2014:E29
- language
- English
- id
- 4462110
- date added to LUP
- 2014-06-26 11:53:21
- date last changed
- 2014-07-04 13:48:11
@misc{4462110, abstract = {{There are many different methods for pricing discretely monitored barrier options. There is a trade-off, however, between speed and accuracy. The players on the financial markets would of course ideally want a method which is both exact and returns a price instantaneously. In this thesis we start from a fast, but on the other hand somewhat less accurate, approximation formula. It will be referred to as the 0.5826-approximation, and was introduced in 1997 by Broadie,Glasserman and Kou [1]. It is one of the option pricing formulas currently used by SunGard. The idea of the 0.5826-approximation is to use the analytical pricing formula for the corresponding continuously monitored barrier option, and to use an adjusted barrier in that formula to account for the decreased probability of a barrier hit. The purpose of this thesis is to improve the 0.5826-approximation for down-and-out call options with barrier less than or equal to the strike, and in particular to mitigate two problems.}}, author = {{Andersson, Filip and Ögren, Mikael}}, issn = {{1404-6342}}, language = {{eng}}, note = {{Student Paper}}, series = {{Master's Theses in Mathematical Sciences}}, title = {{Pricing of Discretely Monitored Barrier Options - Improvement of an Approximation Formula}}, year = {{2014}}, }