Serving the Quantitative Finance Community

 
User avatar
wonabru
Topic Author
Posts: 0
Joined: March 10th, 2010, 7:55 pm

Touch option in local Volatility Model

February 27th, 2013, 11:23 am

Hi,I am working on some project related to bulding different models on options pricing. Now I stuck on having method to build touch (no-touch) options on the base on local volatility model. Till now I did pricing of barriers, double barriers, digitals and double digitals but having problems with touch. I follow this paper http://guerin.ballarat.edu.au/ard/itms/ ... iIWIF1.pdf. I can create local volatility surface and can, with bounadary condition given in the paper, calculate rest exotics. When I try to build touches I got all the time digitals. Do you have experiences with calculating touches and double touches with local volatility model?Best...Krzysztof...
 
User avatar
kelang
Posts: 5
Joined: November 14th, 2011, 4:53 pm

Touch option in local Volatility Model

February 27th, 2013, 2:17 pm

since you can successfully price barriers, then you can price the touch/no touch with the barrier pricer with non-zero rebate. For example, no touch can be price as knock-out with non-zero rebateQuoteOriginally posted by: wonabruHi,I am working on some project related to bulding different models on options pricing. Now I stuck on having method to build touch (no-touch) options on the base on local volatility model. Till now I did pricing of barriers, double barriers, digitals and double digitals but having problems with touch. I follow this paper http://guerin.ballarat.edu.au/ard/itms/ ... iIWIF1.pdf. I can create local volatility surface and can, with bounadary condition given in the paper, calculate rest exotics. When I try to build touches I got all the time digitals. Do you have experiences with calculating touches and double touches with local volatility model?Best...Krzysztof...
 
User avatar
wonabru
Topic Author
Posts: 0
Joined: March 10th, 2010, 7:55 pm

Touch option in local Volatility Model

February 27th, 2013, 2:44 pm

Could you put here some paper in which it is saying like you stated? Or can you show me how from knock-Out non-zero rabate optons we can price no touch option?
 
User avatar
kelang
Posts: 5
Joined: November 14th, 2011, 4:53 pm

Touch option in local Volatility Model

February 27th, 2013, 2:59 pm

sorry no paper in-hand,but it is more intuitive, let us say you price double-no-touch, you can price as double-knock-out digital call, with strike set to the lower touch level or belowQuoteOriginally posted by: wonabruCould you put here some paper in which it is saying like you stated? Or can you show me how from knock-Out non-zero rabate optons we can price no touch option?