AN APPROXIMATION METHOD FOR PRICING CONTINUOUS BARRIER OPTIONS UNDER MULTI-ASSET LOCAL STOCHASTIC VOLATILITY MODELS

Kenichiro Shiraya ()
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Kenichiro Shiraya: Graduate School of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 08, 1-20

Abstract: This paper presents a new approximation method for pricing multi-asset continuous single-barrier options. Barrier options are frequently traded, and it is necessary for practitioners to evaluate these precisely and quickly, both for competitiveness, and for risk management. However, it is a difficult task under local stochastic volatility models. To the best of our knowledge, this paper is the first to provide an analytical approximation for continuous barrier options prices in a multi-asset environment. In numerical experiments, we examine the validity of the formula by using parameters calibrated to EURUSD European options.

Keywords: Approximation formula; barrier options; local stochastic volatility models; multi-asset (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S021902492050051X

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