Accurate Pricing of Continuous Barrier Options With Local Volatility
Article first published online: 30 JAN 2013
Copyright © 2012 Wilmott Magazine Ltd.
Volume 2012, Issue 62, pages 74–81, November 2012
How to Cite
Chibane, M., Miao, H. and Sheldon, G. (2012), Accurate Pricing of Continuous Barrier Options With Local Volatility. Wilmott, 2012: 74–81. doi: 10.1002/wilm.10168
- Issue published online: 30 JAN 2013
- Article first published online: 30 JAN 2013
- Cited By
- barrier option;
- finite difference;
- local volatility;
In this paper we develop accurate technics to price continuous barrier options using a one-dimensional finite difference scheme, allowing for time-dependent drift as well as time- and state-dependent volatilities. We provide numerical examples which demonstrate the smoothness and accuracy of such methods in the Black-Scholes context as well as in the Dupire Local Volatility model.