Implementation of the modified Monte Carlo simulation for evaluate the barrier option prices
In this paper, we apply an improved version of Monte Carlo methods to pricing barrier options. This kind of options may match with risk hedging needs more closely than standard options. Barrier options behave like a plain vanilla option with one exception. A zero payoff may occur before expiry, if t...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Taylor & Francis Group
2017-03-01
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| Series: | Journal of Taibah University for Science |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S1658365515000357 |
| _version_ | 1828232116147585024 |
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| author | Kazem Nouri Behzad Abbasi |
| author_facet | Kazem Nouri Behzad Abbasi |
| author_sort | Kazem Nouri |
| collection | DOAJ |
| description | In this paper, we apply an improved version of Monte Carlo methods to pricing barrier options. This kind of options may match with risk hedging needs more closely than standard options. Barrier options behave like a plain vanilla option with one exception. A zero payoff may occur before expiry, if the option ceases to exist; accordingly, barrier options are cheaper than similar standard vanilla options. We apply a new Monte Carlo method to compute the prices of single and double barrier options written on stocks. The basic idea of the new method is to use uniformly distributed random numbers and an exit probability in order to perform a robust estimation of the first time the stock price hits the barrier. Using uniformly distributed random numbers decreases the estimation of first hitting time error in comparison with standard Monte Carlo or similar methods. It is numerically shown that the answer of our method is closer to the exact value and the first hitting time error is reduced. |
| first_indexed | 2024-04-12T19:15:54Z |
| format | Article |
| id | doaj.art-9cbdb324c55f462980669b4e8ecd9dbc |
| institution | Directory Open Access Journal |
| issn | 1658-3655 |
| language | English |
| last_indexed | 2024-04-12T19:15:54Z |
| publishDate | 2017-03-01 |
| publisher | Taylor & Francis Group |
| record_format | Article |
| series | Journal of Taibah University for Science |
| spelling | doaj.art-9cbdb324c55f462980669b4e8ecd9dbc2022-12-22T03:19:45ZengTaylor & Francis GroupJournal of Taibah University for Science1658-36552017-03-0111223324010.1016/j.jtusci.2015.02.010Implementation of the modified Monte Carlo simulation for evaluate the barrier option pricesKazem NouriBehzad AbbasiIn this paper, we apply an improved version of Monte Carlo methods to pricing barrier options. This kind of options may match with risk hedging needs more closely than standard options. Barrier options behave like a plain vanilla option with one exception. A zero payoff may occur before expiry, if the option ceases to exist; accordingly, barrier options are cheaper than similar standard vanilla options. We apply a new Monte Carlo method to compute the prices of single and double barrier options written on stocks. The basic idea of the new method is to use uniformly distributed random numbers and an exit probability in order to perform a robust estimation of the first time the stock price hits the barrier. Using uniformly distributed random numbers decreases the estimation of first hitting time error in comparison with standard Monte Carlo or similar methods. It is numerically shown that the answer of our method is closer to the exact value and the first hitting time error is reduced.http://www.sciencedirect.com/science/article/pii/S1658365515000357Pricing barrier optionDouble barrierUniform distributionExit probabilityModified Monte Carlo method |
| spellingShingle | Kazem Nouri Behzad Abbasi Implementation of the modified Monte Carlo simulation for evaluate the barrier option prices Journal of Taibah University for Science Pricing barrier option Double barrier Uniform distribution Exit probability Modified Monte Carlo method |
| title | Implementation of the modified Monte Carlo simulation for evaluate the barrier option prices |
| title_full | Implementation of the modified Monte Carlo simulation for evaluate the barrier option prices |
| title_fullStr | Implementation of the modified Monte Carlo simulation for evaluate the barrier option prices |
| title_full_unstemmed | Implementation of the modified Monte Carlo simulation for evaluate the barrier option prices |
| title_short | Implementation of the modified Monte Carlo simulation for evaluate the barrier option prices |
| title_sort | implementation of the modified monte carlo simulation for evaluate the barrier option prices |
| topic | Pricing barrier option Double barrier Uniform distribution Exit probability Modified Monte Carlo method |
| url | http://www.sciencedirect.com/science/article/pii/S1658365515000357 |
| work_keys_str_mv | AT kazemnouri implementationofthemodifiedmontecarlosimulationforevaluatethebarrieroptionprices AT behzadabbasi implementationofthemodifiedmontecarlosimulationforevaluatethebarrieroptionprices |