Simulation-based interactive modelling of barrier option pricing

Juan P. Sáenz, Nurcin Celik

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

The pricing of barrier options is a unique problem faced by the financial world since the options depend on the path taken by 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 possible option types, as well as approximate correction factors, that often make them impractical. To determine the fair price of a barrier option in a practical, computationally efficient setting, in this study, we propose to develop a simulation-based discrete-event modelling framework considering the impacts of inherent interactions between an option's underlying asset and the market. Considering this, the underlying asset's price is split into two components where the first one represents the behaviour of the market and the second one represents the behaviour 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. It has been demonstrated that 45.5%, 32% and 38% of the price of the option is driven solely by the behaviour of the market for options on BHP, POT and RIO, respectively.

Original languageEnglish
Pages (from-to)23-35
Number of pages13
JournalInternational Journal of Modelling and Simulation
Volume34
Issue number1
DOIs
StatePublished - Jan 1 2014

Fingerprint

Barrier Options
Option Pricing
Modeling
Costs
Analytical models
Simulation
Pricing
Discrete Event
Analytical Model
Path
Market
Interaction

Keywords

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

ASJC Scopus subject areas

  • Hardware and Architecture
  • Software
  • Modeling and Simulation
  • Mechanics of Materials
  • Electrical and Electronic Engineering

Cite this

Simulation-based interactive modelling of barrier option pricing. / Sáenz, Juan P.; Celik, Nurcin.

In: International Journal of Modelling and Simulation, Vol. 34, No. 1, 01.01.2014, p. 23-35.

Research output: Contribution to journalArticle

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