Facoltà di scienze economiche

Interest rate barrier options

Barone-Adesi, Giovanni ; Sorwar, Ghulam

Less expensive than standard options, barrier options have become very popular in recent years as useful hedging instruments for risk management strategies. Thus far valuation approaches have largely focused on equity barrier options, where in certain instances analytical expressions may be available. In this paper we use Monte Carlo procedure to value barrier options based on the Chan, Karolyi,... Plus

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    Summary
    Less expensive than standard options, barrier options have become very popular in recent years as useful hedging instruments for risk management strategies. Thus far valuation approaches have largely focused on equity barrier options, where in certain instances analytical expressions may be available. In this paper we use Monte Carlo procedure to value barrier options based on the Chan, Karolyi, Longstaff and Sanders interest rate process. By performing simulations with and without including the recently suggested Sharp Large Deviations, we show that standard Monte Carlo procedure substantially misprices barrier options.