Application of Finite Difference Method for Pricing Barrier Options
نویسندگان
چکیده
Abstract In recent years a number of authors pointed out significant stability and convergence problems while using Cox-Ross-Rubinstein binomial method to price and hedge barrier options. Different modifications were suggested to improve the convergence and stability of the binomial method. However, as this article shows, lattice approach in general has limited stability factor when applied to barrier options.
منابع مشابه
Barrier options pricing of fractional version of the Black-Scholes model
In this paper two different methods are presented to approximate the solution of the fractional Black-Scholes equation for valuation of barrier option. Also, the two schemes need less computational work in comparison with the traditional methods. In this work, we propose a new generalization of the two-dimensional differential transform method and decomposition method that will extend the appli...
متن کاملPricing Multi-asset Options with an External Barrier
An external barrier of an option contract is a stochastic variable which determines whether the option is knocked in or out when the value of the variable is above or below some predetermined level, but itself is not the price of an asset which underlies the option. In this paper, we present analytic formulation for the valuation of European options on one or multiple assets with single externa...
متن کاملStudies of Barrier Options and their Sensitivities
Barrier options are cheaper than the respective standard European options, because a zero payoff may occur before expiry time T. Lower premiums are usually offered for more exotic barrier options, which make them particularly attractive to hedgers in the financial market. Under the Black-Scholes framework, we explicitly derive and present pricing formulae for a range of different European barri...
متن کاملB-splines Method with Redefined Basis Functions for Solving Barrier Options Pricing Model
In this paper, we construct a numerical method to the solution of Black-Scholes partial differential equation modelling Barrier option pricing problem on a single asset. We use finite difference approximations for temporal derivative and then the option price is approximated with the redefined B-spline functions. Stability of this method has been discussed and shown that it is unconditionally s...
متن کاملFinite Difference Methods for Option Pricing under Lévy Processes: Wiener-Hopf Factorization Approach
In the paper, we consider the problem of pricing options in wide classes of Lévy processes. We propose a general approach to the numerical methods based on a finite difference approximation for the generalized Black-Scholes equation. The goal of the paper is to incorporate the Wiener-Hopf factorization into finite difference methods for pricing options in Lévy models with jumps. The method is a...
متن کامل