Implementation of Finite Difference Technique for Exotic Double Barrier Options

Posted: 30 Mar 2008 Last revised: 27 Jan 2009

See all articles by Pratik Sharda

Pratik Sharda

University of California, Berkeley - Haas School of Business

Ravishekar Subramanian

University of California, Berkeley - Haas School of Business

Abstract

In this paper, we attempt to price a complex barrier option using Finite Difference (FD) techniques. The focus is to demonstrate the strength of the FD to deal with various seemingly complicated issues like jump diffusion, Early exercise in a relatively easy way and at a lower computational cost compared to the normal Monte Carlo (MC) techniques. The prices were reliable and efficiency gains are benchmarked against the results from a pure Monte Carlo simulation and other analytical values. The paper also deals with issues on implication of dividend incorporation, treatment of boundary conditions, and hedging.

Suggested Citation

Sharda, Pratik and Subramanian, Ravishekar, Implementation of Finite Difference Technique for Exotic Double Barrier Options. Available at SSRN: https://ssrn.com/abstract=1114388

Pratik Sharda (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Ravishekar Subramanian

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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