The evaluation of barrier option prices under stochastic volatility

TY - JOUR

T1 - The evaluation of barrier option prices under stochastic volatility

AU - Chiarella, C.

AU - Kang, B.

AU - Meyer, G.H.

PY - 2012/9/1

Y1 - 2012/9/1

N2 - This paper considers the problem of numerically evaluating barrier option prices when the dynamics of the underlying are driven by stochastic volatility following the square root process of Heston (1993) [7]. 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 efficiently handle both continuously 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.

AB - This paper considers the problem of numerically evaluating barrier option prices when the dynamics of the underlying are driven by stochastic volatility following the square root process of Heston (1993) [7]. 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 efficiently handle both continuously 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.

UR - http://www.scopus.com/inward/record.url?scp=84865627749&partnerID=8YFLogxK

U2 - 10.1016/j.camwa.2012.03.103

DO - 10.1016/j.camwa.2012.03.103

M3 - Article

AN - SCOPUS:84865627749

SN - 0898-1221

VL - 64

SP - 2034

EP - 2048

JO - Computers & mathematics with applications

JF - Computers & mathematics with applications

IS - 6

ER -