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On Pricing Barrier Options with Discrete Monitoring

  • Kenichiro Shiraya

    (Mizuho-DL Financial Technology Co., Ltd.)

  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Toshihiro Yamada

    (Mitsubishi UFJ Trust Investment Technology Institute Co.,Ltd. (MTEC))

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    This paper proposes a new approximation method for pricing barrier options with discrete monitoring under stochastic volatility environment. In particular, the integration-by-parts formula and the duality formula in Malliavin calculus are effectively applied in an asymptotic expansion approach. First, the paper derives an asymptotic expansion for generalized Wiener functionals. After it is applied to pricing path-dependent derivatives with discrete monitoring, the paper presents an analytic (approximation) formula for valuation of discrete barrier options under stochastic volatility environment. To our knowledge, this paper is the first one that shows an analytical approximation for pricing discrete barrier options with stochastic volatility models. Finally, it provides numerical examples for pricing double barrier call options with discrete monitoring under the Heston model.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2010/2010cf725.pdf
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    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-725.

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    Length: 18pages
    Date of creation: Mar 2010
    Date of revision:
    Handle: RePEc:tky:fseres:2010cf725
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    1. Gianluca Fusai & I. Abrahams & Carlo Sgarra, 2006. "An exact analytical solution for discrete barrier options," Finance and Stochastics, Springer, vol. 10(1), pages 1-26, 01.
    2. Akihiko Takahashi & Toshihiro Yamada, 2009. "An Asymptotic Expansion with Push-Down of Malliavin Weights," CIRJE F-Series CIRJE-F-695, CIRJE, Faculty of Economics, University of Tokyo.
    3. Akihiko Takahashi & Nakahiro Yoshida, 2004. "An Asymptotic Expansion Scheme for Optimal Investment Problems," Statistical Inference for Stochastic Processes, Springer, vol. 7(2), pages 153-188, May.
    4. Eric Fournié & Jean-Michel Lasry & Pierre-Louis Lions & Jérôme Lebuchoux & Nizar Touzi, 1999. "Applications of Malliavin calculus to Monte Carlo methods in finance," Finance and Stochastics, Springer, vol. 3(4), pages 391-412.
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