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An Approximation Method For Pricing Continuous Barrier Options Under Multi-Asset Local Stochastic Volatility Models

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  • KENICHIRO SHIRAYA

    (Graduate School of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan)

Abstract

This paper presents a new approximation method for pricing multi-asset continuous single-barrier options. Barrier options are frequently traded, and it is necessary for practitioners to evaluate these precisely and quickly, both for competitiveness, and for risk management. However, it is a difficult task under local stochastic volatility models. To the best of our knowledge, this paper is the first to provide an analytical approximation for continuous barrier options prices in a multi-asset environment. In numerical experiments, we examine the validity of the formula by using parameters calibrated to EURUSD European options.

Suggested Citation

  • Kenichiro Shiraya, 2020. "An Approximation Method For Pricing Continuous Barrier Options Under Multi-Asset Local Stochastic Volatility Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(08), pages 1-20, December.
    • Handle: RePEc:wsi:ijtafx:v:23:y:2020:i:08:n:s021902492050051x
    DOI: 10.1142/S021902492050051X
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