PT - JOURNAL ARTICLE
AU - Anderluh, Jasper
AU - Meester, Ludolf
TI - Pricing Options with Non-Standard Barrier Mechanisms
AID - 10.3905/jod.2013.21.2.075
DP - 2013 Nov 30
TA - The Journal of Derivatives
PG - 75--88
VI - 21
IP - 2
4099 - http://jod.pm-research.com/content/21/2/75.short
4100 - http://jod.pm-research.com/content/21/2/75.full
AB - Monte Carlo simulation is generally required when a derivaMonte Carlo simulation is generally required when a derivative’s payoff is path dependent. For many such instruments, the payoff depends on whether the price of the underlying reaches a stopping point before option expiration, such as the default time for a credit product, or a knock-out barrier. For more complicated products like “Parisian” options, the issue is not just penetrating a fixed price barrier, but how long the asset price stays beyond it. In this article, the authors show how valuation of these instruments can be speeded up, sometimes by a remarkable amount, by modeling the (sequence of) hitting times and filling in the in-between prices as needed. An important tool in doing this is the authors’ new technique for simulating paths backward from a future barrier crossing. One additional advantage of their method is that it is possible to use a broad range of simpler derivatives as control variates in the simulation. They provide pseudocode for the procedure in an Appendix.TOPICS: Options, simulations