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Modelling exchange‐traded barrier options traded in the Australian options market

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  • Steve Easton
  • Richard Gerlach

Abstract

Barrier options traded in the Australian market vary considerably in terms of the extent to which the barrier is monitored and in terms of the location of the barrier level relative to the exercise price. This paper examines the impact of these differences on prices and also on deltas and gammas. We find that it is not possible to generalize results concerning hedge parameter values to all barrier options. We find that options examined by Easton et al. (2004) do not display discontinuity of deltas at the barrier levels and that their apparent overpricing cannot be attributed to hedging difficulties.

Suggested Citation

  • Steve Easton & Richard Gerlach, 2007. "Modelling exchange‐traded barrier options traded in the Australian options market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 47(1), pages 109-122, March.
    • Handle: RePEc:bla:acctfi:v:47:y:2007:i:1:p:109-122
    DOI: 10.1111/j.1467-629X.2006.00198.x
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    References listed on IDEAS

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    1. Mark Broadie & Paul Glasserman & Steven Kou, 1997. "A Continuity Correction for Discrete Barrier Options," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 325-349, October.
    2. Kemna, A. G. Z. & Vorst, A. C. F., 1990. "A pricing method for options based on average asset values," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 113-129, March.
    3. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(3), pages 377-389, September.
    4. Steve Easton & Richard Gerlach & Melissa Graham & Frank Tuyl, 2004. "An empirical examination of the pricing of exchange‐traded barrier options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(11), pages 1049-1064, November.
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