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Analytic Methods for Pricing Double Barrier Options Volatility Faulhaber 2002

Analytic Methods for Pricing Double Barrier Options Volatility Faulhaber 2002

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Published by: Imran Ahsan on Mar 23, 2012
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O
LIVER
F
AULHABER
A
NALYTIC
M
ETHODS FOR
P
RICING
D
OUBLE
B
ARRIER
O
PTIONS IN THE
P
RESENCE OF
S
TOCHASTIC
V
OLATILITY
100110120Spot00.020.040.060.080.1Volatility00.10.2Price110120Spot0.020.040.060.081Volatility
A thesis submitted for the grade of Diplom-Wirtschaftsmathematikerat the Mathematical Department of the University of Kaiserslautern, GermanySupervised by Prof. Dr. Ralf KornJuly 31st, 2002
 
Preface
While there exist closed-form solutions for vanilla options in the presence of stochastic volatility for nearly a decade[Heston, 1993], practitioners still dependon numerical methods – in particular the Finite Difference and Monte Carlo meth-ods – in the case of double barrier options. It was only recently that Lipton [2001]proposed (semi-)analytical solutions for this special class of path-dependent op-tions.Although he presents two different approaches to derive these solutions, herestricts himself in both cases to a less general model, namely one where the corre-lation and the interest rate differential are assumed to be zero. Naturally the ques-tion arises, if these methods are still applicable for the general stochastic volatilitymodel without these restrictions.In this paper we show that such a generalization fails for both methods. Wewill explain why this is the case and discuss the consequences of our results.i
 
Acknowledgements
I want to thank Professor Ralf Korn for supervising my thesis.I further want to express my gratitude to Dr. J¨urgen Hakala, Dr. Uwe Wystupand the whole team of Quantitative FX Reseach at Commerzbank Frankfurt forsuggesting the topic of the thesis and their support throughout its development.I also want to thank Alexander Lipton for his clarifications and last but not leastmy wife Chen Nee for her patience.ii

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