Pricing Exotic Barrier Options with Finite Differences

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