Sensitivity analysis for barrier options

Authors:
Yongqiang Wang;Michael C. Fu;Steven I. Marcus
Affiliations:
University of Maryland, College Park, MD;University of Maryland, College Park, MD;University of Maryland, College Park, MD
Venue:
Winter Simulation Conference
Year:
2009

Citing 3
Cited 2

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Pathwise derivative methods on single-asset american option sensitivity estimation

Proceedings of the Winter Simulation Conference

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Abstract

Barrier options are popular derivative securities with payoffs dependent on whether or not an underlying asset crosses a barrier. This paper presents a Monte Carlo simulation-based method of sensitivity analysis for barrier options based on smoothed perturbation analysis (SPA) for a general form of discontinuous sample function payoffs. The connection between the resulting SPA estimator and the probability formula derived in Hong (2008) and its generalization in Liu and Hong (2009) is explored. Using a Brownian bridge result, the estimator is applied to continuously-monitored barrier options with rebates. Illustrative simulation examples are provided.