Pricing Barrier and Average Options under Stochastic Volatility Environment
AbstractThis paper proposes a new approximation method of pricing barrier and average options under stochastic volatility environment by applying an asymptotic expansion approach. In particular, a high-order expansion scheme for general multi-dimensional diffusion processes is effectively applied. Moreover, the paper combines a static hedging method with the asymptotic expansion method for pricing barrier options. Finally, numerical examples show that the fourth or fifth-order asymptotic expansion scheme provides sufficiently accurate approximations under the C-SABR and SABR models.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-682.
Date of creation: Oct 2009
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- Akihiko Takahashi & Toshihiro Yamada, 2009. "An Asymptotic Expansion with Malliavin Weights: An Application to Pricing Discrete Barrier Options," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-696, CIRJE, Faculty of Economics, University of Tokyo.
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