Pricing Barrier options using Monte Carlo
I am trying to price a barrier option using a Monte Carlo simulation and thought this was the most relevant forum to look for help. If you are knowledgeable in this area please PM me!
i have a nice 1979 Monte Carlo. what i do is i get in, and if i am lucky, the engine turns over. i drive over to the quad where my engineering buddies are and i ask them: "how the fuck do i price this option?"
This is probably not the best place to look for help regarding pricing solutions. I would recommend you to ask your questions at the wilmott forum instead, see link below. The people there will be able to help you.
http://wilmott.com/index.cfm?NoCookies=Yes&forumid=1
Wilmott is a good resource but pricing a barrier option is fairly simple. The general steps are as follows:
Use a model (like Geometric Brownian Motion) to simulation your stock evolutions Define your barrier(s) Create your conditional statements that call your other functions once a stock path hits a barrier Finally price your option as a vanilla put, call, or a combination of
The whole process is pretty much the same as pricing a vanilla put or call using Monte Carlo simulation. The only difference is that the option doesn't become live until that barrier is hit.
A good resource are some old papers written by Derman. He has a 2 or 3 part paper on barrier options.
http://www.ederman.com/new/docs/insoutbarriers1.pdf
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