Open AccessPricing the exotic: Path-dependent American options with stochastic barriers
Author(s) -
Alejandro Rojas-Bernal,
Mauricio VillamizarVillegas
Publication year - 2021
Language(s) - English
Resource type - Reports
DOI - 10.32468/be.1156
Subject(s) - exotic option , monte carlo methods for option pricing , greeks , monte carlo method , asian option , valuation of options , portfolio , mathematical optimization , econometrics , sensitivity (control systems) , computer science , binomial options pricing model , economics , mathematics , financial economics , engineering , statistics , electronic engineering
We develop a novel pricing strategy that approximates the value of an American option with exotic features through a portfolio of European options with different maturities. Among our findings, we show that: (i) our model is numerically robust in pricing plain vanilla American options; (ii) the model matches observed bids and premiums of multidimensional options that integrate Ratchet, Asian, and Barrier characteristics; and (iii) our closed-form approximation allows for an analytical solution of the option’s greeks, which characterize the sensitivity to various risk factors. Finally, we highlight that our estimation requires less than 1% of the computational time compared to other standard methods, such as Monte Carlo simulations.