The Hedging Costs of Discrete Monitoring of FX Barrier Options

12 Pages Posted: 30 Jan 2009

Date Written: January 30, 2009

Abstract

The effects of the discrete monitoring of barrier options is analysed. We determine the costs that a market-maker should charge when making prices for such a kind of exotic options. The costs are related to the Delta-hedging activity around the barrier level between two subsequent monitoring dates, by assuming a reasonable hedging rule followed by the trader. We explain how our result is related to an apparently similar result by Becker and Wystup (2005) and finally we present a practical application showing that the inclusion of the Delta-hedging costs has a relevant impact on the discretely monitored barrier options prices.

Keywords: discrete monitored barrier, local time, slippage cost, hedging cost, ecb 37

JEL Classification: G13

Suggested Citation

Castagna, Antonio, The Hedging Costs of Discrete Monitoring of FX Barrier Options (January 30, 2009). Available at SSRN: https://ssrn.com/abstract=1335302 or http://dx.doi.org/10.2139/ssrn.1335302

Antonio Castagna (Contact Author)

Iason Ltd. ( email )

7th Floor, Hume House
Dublin, 4
Ireland