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Pat
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FX barrier options

December 7th, 2017, 9:42 pm

Does anyone recall the standard way of pricing barrier options ? The way the street does it, as opposed theory
 
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Cuchulainn
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Re: FX barrier options

December 8th, 2017, 8:59 am

my 2 cents

My guess is quants use numerical methods such as Crank Nicolson + workarounds a lot, at least for equities. It's fast and accurate (in the main). I reckon any method must be fast and accurate?

Maybe there is a better method. I don't know, myself.
 
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Martinghoul
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Re: FX barrier options

December 8th, 2017, 10:51 am

I was under the impression that the bog standard methods that prevail in FX and have been covered by Wystup dominate.  I may be wrong abt that.
 
EdwinB
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Re: FX barrier options

February 13th, 2018, 12:58 am

A knock-In option is a type of barrier option that only comes into existence when the price of the underlying security reaches a specified barrier at any point in time during the option's life. Once a barrier is knocked in, or comes into existence, the option will not cease to exist until the option expires.

Knock-in options may be classified as up-and-in or down-and-in. In an up-and-in barrier option, the option only comes into existence if the price of the underlying asset rises above the pre-specified barrier, which is set above the initial asset price. Conversely, a down-and-in barrier option only comes into existence when the underlying asset price moves below a pre-determined barrier that is set below the initial asset price.

For example, assume an investor purchases a up-and-in call option with a strike price of $60 and a barrier of $65, when the underlying stock was trading at $55. Therefore, the option would not come into existence until the underlying stock price moved above $65.
 
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Collector
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Re: FX barrier options

February 19th, 2018, 10:42 pm

Soft or plain? Double or single? DEM or EURO?

Image
 
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travisf
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Re: FX barrier options

February 20th, 2018, 8:56 pm

Pat wrote:
Does anyone recall the standard way of pricing barrier options ? The way the street does it, as opposed theory

Wow this sat for a long time without an on-point reply.  I would say the introductory paragraphs of Austing and Li's recent paper on model-independent barrier pricing accurately describe what the street does: everyone has their own in-house variation of a local/stochastic volatility model.  The details vary, but the final results are similar.  Austing & Li 2017 : "[color=#660099]Model-free valuation of barrier options"[/color] https://www.risk.net/media/download/949701/download
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