Pricing Exotic Barrier Options with Finite Differences

29 Pages Posted: 30 May 2007

See all articles by Guanghua Cao

Guanghua Cao

Morgan Stanley

Roderick MacLeod

Rodel Tech Financial; U.C. Berkeley Master of Financial Engineering; MIT - B.S. Management Science / Finance

Date Written: September 22, 2005

Abstract

A barrier option is a derivative instrument whose payoff is dependent on the path of the underlying security up to maturity. We design a pricing system using Finite Differences to investigate the properties of and price options with exotic barrier features. The system determines the payoff, delta and gamma functions of these options with accuracy and speed, and can therefore provide quality pricing and hedging parameters to the professional trading community.

Keywords: Barrier Option, Derivative, Path-Dependent Payoff, Finite Differences, Exotic Options, Payoff, Delta, Gamma, Accuracy, Speed

JEL Classification: G1, G10, G12, G13, G14, G22, C61, C63

Suggested Citation

Cao, Guanghua and MacLeod, Roderick, Pricing Exotic Barrier Options with Finite Differences (September 22, 2005). Available at SSRN: https://ssrn.com/abstract=989641 or http://dx.doi.org/10.2139/ssrn.989641

Guanghua Cao (Contact Author)

Morgan Stanley ( email )

1585 Broadway
New York, NY 10019
United States

Roderick MacLeod

Rodel Tech Financial ( email )

London
United Kingdom

HOME PAGE: http://www.rodeltechfin.com

U.C. Berkeley Master of Financial Engineering ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

MIT - B.S. Management Science / Finance ( email )

Cambridge, MA 02136
United States

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