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The Evaluation Of Barrier Option Prices Under Stochastic Volatility

This paperc onsiders the problem o fnumerically evaluating barrier option prices when the dynamics of the underlying are driven by stochastic volatility following the square root process of Heston (1993). We develop a method of lines approach to evaluate the price as well as the delta and gamma of the option. The method is able to effciently handle bothc ontinuously monitored and discretely monitored barrier options and can also handle barrier options with early exercise features. In the latter case, we can calculate the early exercise boundary of an American barrier option in both the continuously and discretely monitored cases.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp266.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 266.

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Length: 26
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:uts:rpaper:266
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Web page: http://www.qfrc.uts.edu.au/

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