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Valuation of Discrete Barrier American Options

Author

Listed:
  • Giuliano Carroza Uzêda Iorio de Souza

    (Vale International SA – Global Risk Management Department)

  • Carlos Patrício Samanez

    (Departamento de Engenharia Industrial – PUC-Rio.)

Abstract

This article presents an approach and a model to valuing discrete barrier American options. The developed model consists of an adaptation of the method of Grant, Vora and Weeks (1997), in order to allow to incorporate the barriers. The Hybrid Quasi-Monte Carlo method was used in the simulations and the Bisection method in the definition of the options trigger curves. The results found in the application of the developed model were compared with the estimated by the Adaptive Mesh Model, developed by Ahn et al (1999). In addition, the sensitivity of the options price relative to changes in inputs parameters was analyzed, confirming the consistence of the model.

Suggested Citation

  • Giuliano Carroza Uzêda Iorio de Souza & Carlos Patrício Samanez, 2009. "Valuation of Discrete Barrier American Options," Brazilian Review of Finance, Brazilian Society of Finance, vol. 7(4), pages 503-521.
    • Handle: RePEc:brf:journl:v:7:y:2009:i:4:p:503-521
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    More about this item

    Keywords

    derivatives; options; numerical methods;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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