Interactive discrete event modeling of barrier option pricing

Juan Pablo Sáenz, Nurcin Celik

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

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 languageEnglish
Title of host publication62nd IIE Annual Conference and Expo 2012
PublisherInstitute of Industrial Engineers
Pages1207-1216
Number of pages10
StatePublished - Jan 1 2012
Event62nd IIE Annual Conference and Expo 2012 - Orlando, FL, United States
Duration: May 19 2012May 23 2012

Other

Other62nd IIE Annual Conference and Expo 2012
CountryUnited States
CityOrlando, FL
Period5/19/125/23/12

Fingerprint

Costs
Analytical models
Monte Carlo simulation

Keywords

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

ASJC Scopus subject areas

  • Industrial and Manufacturing Engineering

Cite this

Sáenz, J. P., & Celik, N. (2012). Interactive discrete event modeling of barrier option pricing. In 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.

62nd IIE Annual Conference and Expo 2012. Institute of Industrial Engineers, 2012. p. 1207-1216.

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

Sáenz, JP & Celik, N 2012, Interactive discrete event modeling of barrier option pricing. in 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.
Sáenz JP, Celik N. Interactive discrete event modeling of barrier option pricing. In 62nd IIE Annual Conference and Expo 2012. Institute of Industrial Engineers. 2012. p. 1207-1216
Sáenz, Juan Pablo ; Celik, Nurcin. / Interactive discrete event modeling of barrier option pricing. 62nd IIE Annual Conference and Expo 2012. Institute of Industrial Engineers, 2012. pp. 1207-1216
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