The Evaluation Of Barrier Option Prices Under Stochastic Volatility

Carl Chiarella, Boda Kang and Gunter H. Meyer

No 266, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paperc onsiders the problem o fnumerically evaluating barrier option prices when the dynamics of the underlying are driven by stochastic volatility following the square root process of Heston (1993). We develop a method of lines approach to evaluate the price as well as the delta and gamma of the option. The method is able to effciently handle bothc ontinuously monitored and discretely monitored barrier options and can also handle barrier options with early exercise features. In the latter case, we can calculate the early exercise boundary of an American barrier option in both the continuously and discretely monitored cases.

Keywords: barrier option; stochastic volatility; continuously monitored; discretely monitored; free boundary problem; method of lines; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: C61 D11 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2010-01-01
New Economics Papers: this item is included in nep-bec and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as: Chiarella, C., Kang, B. and Meyer, G. H., 2012, "The Evaluation Of Barrier Option Prices Under Stochastic Volatility", Computers & Mathematics with Applications, 64(6), 2034-2048.

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