Barrier Option Pricing

This thesis examines the performance of five option pricing models with respect to the pricing of barrier options. The models include the Black-Scholes model and four stochastic volatility models ranging from the single-factor stochastic volatility model first proposed by Heston (1993) to a multi-factor stochastic volatility model with jumps in the spot price process. The stochastic volatility models are calibrated using four different loss functions to examine the loss functions effect on the resulting barrier option prices. Our results show that the Black-Scholes model yields significantly different prices than the stochastic volatility models for barriers far from the current spot price. The prices of the four stochastic volatility models are however very similar. We also show that the choice of loss function for parameter estimation has little effect on the obtained barrier option prices. Acknowledgements: I would like to thank my tutor Camilla Landén for helpful advice during the writing of this thesis.