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Using Monte Carlo Simulation and Importance Sampling to Rapidly Obtain Jump-Diffusion Prices of Continuous Barrier Options

Mark S. Joshi
University of Melbourne - Centre for Actuarial Studies

Terence Leung
University College London

October 1, 2005

Abstract:
The problem of pricing a continuous barrier option in a jump-diffusion model is studied. It is shown that via an effective combination of importance sampling and analytic formulas thatsubstantial speed ups can be achieved. These techniques are shown to be particularly effective for computing deltas.

Keywords: jump-diffusion, barrier option, Monte Carlo, importance sampling

JEL Classifications: C19

Working Paper Series

Date posted: June 12, 2006 ; Last revised: April 30, 2007

Suggested Citation

Joshi, Mark S. and Leung, Terence, Using Monte Carlo Simulation and Importance Sampling to Rapidly Obtain Jump-Diffusion Prices of Continuous Barrier Options (October 1, 2005). Available at SSRN: http://ssrn.com/abstract=907386

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Contact Information

Mark Joshi (Contact Author) University of Melbourne - Centre for Actuarial Studies ( email ) Melbourne Australia
Terence Leung University College London ( email ) Gower Street London WC1E 6BT Great Britain