### Abstract

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 language | English |
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Title of host publication | 62nd IIE Annual Conference and Expo 2012 |

Publisher | Institute of Industrial Engineers |

Pages | 1207-1216 |

Number of pages | 10 |

State | Published - Jan 1 2012 |

Event | 62nd IIE Annual Conference and Expo 2012 - Orlando, FL, United States Duration: May 19 2012 → May 23 2012 |

### Other

Other | 62nd IIE Annual Conference and Expo 2012 |
---|---|

Country | United States |

City | Orlando, FL |

Period | 5/19/12 → 5/23/12 |

### Fingerprint

### Keywords

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

### ASJC Scopus subject areas

- Industrial and Manufacturing Engineering

### Cite this

*62nd IIE Annual Conference and Expo 2012*(pp. 1207-1216). Institute of Industrial Engineers.

**Interactive discrete event modeling of barrier option pricing.** / Sáenz, Juan Pablo; Celik, Nurcin.

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution

*62nd IIE Annual Conference and Expo 2012.*Institute of Industrial Engineers, pp. 1207-1216, 62nd IIE Annual Conference and Expo 2012, Orlando, FL, United States, 5/19/12.

}

TY - GEN

T1 - Interactive discrete event modeling of barrier option pricing

AU - Sáenz, Juan Pablo

AU - Celik, Nurcin

PY - 2012/1/1

Y1 - 2012/1/1

N2 - 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.

AB - 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.

KW - Barrier option pricing

KW - Exotic options

KW - Market beta

KW - Market interaction

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UR - http://www.scopus.com/inward/citedby.url?scp=84900332648&partnerID=8YFLogxK

M3 - Conference contribution

SP - 1207

EP - 1216

BT - 62nd IIE Annual Conference and Expo 2012

PB - Institute of Industrial Engineers

ER -