Sensitivity analysis for barrier options

Author

Wang, Yongqiang ; Fu, Michael C. ; Marcus, Steven I.

Author_Institution

Dept. of Electr. & Comput. Eng., Univ. of Maryland, College Park, MD, USA

fYear

2009

fDate

13-16 Dec. 2009

Firstpage

1272

Lastpage

1282

Abstract

Barrier options are popular derivative securities with payoffs dependent on whether or not an underlying asset crosses a barrier. This paper presents a Monte Carlo simulation-based method of sensitivity analysis for barrier options based on smoothed perturbation analysis (SPA) for a general form of discontinuous sample function payoffs. The connection between the resulting SPA estimator and the probability formula derived in Hong (2008) and its generalization in Liu and Hong (2009) is explored. Using a Brownian bridge result, the estimator is applied to continuously-monitored barrier options with rebates. Illustrative simulation examples are provided.

Keywords

Monte Carlo methods; pricing; probability; share prices; Monte Carlo simulation based method; continuously monitored barrier options; derivative securities; option pricing; probability formula; sensitivity analysis; smoothed perturbation analysis; Analytical models; Bridges; Computational modeling; Computer security; Educational institutions; Finance; Monte Carlo methods; Pricing; Sensitivity analysis; Stochastic processes;

fLanguage

English

Publisher

ieee

Conference_Titel

Simulation Conference (WSC), Proceedings of the 2009 Winter

Conference_Location

Austin, TX

Print_ISBN

978-1-4244-5770-0

Type

conf

DOI

10.1109/WSC.2009.5429560

Filename

5429560