On the Least-Squares Monte Carlo (LSM) for Pricing American Barrier Options
Date Issued
2005-06
Date
2005-06
Author(s)
Lee, Chia-Peng
DOI
2006092712285486726
Abstract
Barrier options are options that are either extinguished (“out”) or established
(“in”), when the price of the underlying asset crosses a particular level
(“barrier”). Common examples are “down-and-out,” “down-and-in,”
“up-and-out” and “up-and-in” options, which can be calls or puts. An additional
feature of some barrier options is that a rebate is paid when the option is
extinguished or an additional premium is due when the option is established.
Closed-form formulas for European barrier options are known in the literature.
This is not the case for American barrier options, for which no closed-form
formulas have been published. One has therefore had to resort to numerical
methods. Using lattice models on binomial or trinomial trees for the valuation
of barrier options is known to converge extremely slowly compared to plain
vanilla options. In this thesis we show how to apply a simple, yet powerful,
least-square Monte Carlo algorithm to approximate the value of American
barrier options.
Publisher
臺北市:國立臺灣大學財務金融學系
Type
report
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Format
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