A numerical scheme based on semi-static hedging strategy

DOI10.1515/MCMA-2014-0002MaRDI QIDQ487521zbMATH OpenOpenAlexFDO

Authors Yuri Imamura, Yuta Ishigaki, Toshiki Okumura

Publication date 22 January 2015

Published in Monte Carlo Methods and Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1206.2934

zbMATH Keywords

stochastic volatility modelsstatic hedgingbarrier optionsput-call symmetry

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Diffusion processes (60J60) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Numerical solutions to stochastic differential and integral equations (65C30)

Abstract: In the present paper, we introduce a numerical scheme for the price of a barrier option when the price of the underlying follows a diffusion process. The numerical scheme is based on an extension of a static hedging formula of barrier options. For getting the static hedging formula, the underlying process needs to have a symmetry. We introduce a way to "symmetrize" a given diffusion process. Then the pricing of a barrier option is reduced to that of plain options under the symmetrized process. To show how our symmetrization scheme works, we will present some numerical results applying (path-independent) Euler-Maruyama approximation to our scheme, comparing them with the path-dependent Euler-Maruyama scheme when the model is of the Black-Scholes, CEV, Heston, and $(lambda)$-SABR, respectively. The results show the effectiveness of our scheme.

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Cited in

(9)

• Analytical pricing of single barrier options under local volatility models
• Stability problem for one-dimensional stochastic differential equations with discontinuous drift
• Carr-Nadtochiy's weak reflection principle for Markov chains on \(\mathbb{Z}^d\)
• On a symmetrization of diffusion processes
• On the convergence order of a binary tree approximation of symmetrized diffusion processes
• Hyperbolic symmetrization of Heston type diffusion
• Symmetrization associated with hyperbolic reflection principle
• A numerical scheme for expectations with first hitting time to smooth boundary
• Speeding up the Euler scheme for killed diffusions

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