Pricing Barrier options using Monte Carlo

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