On Pricing Dsicrete Barrier Options
Description:
Discrete barrier options will be studied, as well as hitting times of the geometric Brownian motion. The study will focus on European single barrier options, in particular the pricing and the hedging of discrete barrier options. Approximation methods exist for such options [3,4], but perform typically bad when the stock price gets close to the barrier at maturity. The goal of the project is to improve on these approximation methods in order to circumvent this problem. A new theoretical formula should therefore be proposed for the option price. The performance of the new formula will be evaluated on both simulated and real data.
Prerequisites:
The student should be at ease with probability, stochastic calculus and Matlab programming.
References:
[1] J. C. Hull, Options, Futures, and other Derivative Securities, 4th edition. Prentice Hall, New Jersey.
[2] P. Carr, A. Chou, Breaking Barriers, Risk magazine 10, 139-144, 1997.
[3] S. Kou, On Pricing of Discrete Barrier Options, Statistica Sinica 13, Columbia University, NY, 2003.
[4] P. Hörfelt, Extension of the Corrected Barrier Approximation by Broadie, Glasserman and Kou, Finance and Stochastics 7, 231-243, 2003.
Supervisor:
Dr. Olivier Lévêque (LTHI) * Email: olivier.leveque#epfl.ch * Office: INR 132 * Tel: 38112