Interactive discrete event modeling of barrier option pricing

Juan Pablo Sáenz, Nurcin Celik

Research output: Chapter in Book/Report/Conference proceedingConference contribution


Barrier options are options that either begin or cease to exist once the spot price of option's underlying asset crosses the barrier. Pricing of barrier options is a unique problem faced by the financial world as options heavily depend on their underlying asset's spot price. The methods of pricing these exotic options include computationally heavy analytical models that often require specific considerations for each of the different option types as well as correction factors that often make them not practical. In order to determine the fair price of a barrier option in a practical and computationally efficient setting, we propose a discrete-event modeling framework based on Monte Carlo simulations considering the inherent interactions between an option's underlying asset and the market. Here, the underlying asset's price is split into two components where the first one represents the behavior of the market and second represents the behavior of the underlying asset that is independent from the market. The proposed framework has been employed to establish the fair price of options on the stocks of BHP, POT and RIO where 45.5%, 32%, and 38% of the price of the option, respectively, is driven solely by the behavior of the market.

Original languageEnglish
Title of host publication62nd IIE Annual Conference and Expo 2012
PublisherInstitute of Industrial Engineers
Number of pages10
StatePublished - Jan 1 2012
Event62nd IIE Annual Conference and Expo 2012 - Orlando, FL, United States
Duration: May 19 2012May 23 2012


Other62nd IIE Annual Conference and Expo 2012
Country/TerritoryUnited States
CityOrlando, FL


  • Barrier option pricing
  • Exotic options
  • Market beta
  • Market interaction

ASJC Scopus subject areas

  • Industrial and Manufacturing Engineering


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