Pricing, Loss and Sensitivity Analysis of Barrier Options via Regression

25 Pages Posted: 26 Jun 2018 Last revised: 25 Mar 2024

See all articles by Andreas Gabler

Andreas Gabler

EBS Universität für Wirtschaft und Recht, EBS Business School, Students

Martin Wiegand

The University of Manchester

Joerg Osterrieder

University of Twente; Bern Business School

Date Written: March 21, 2018

Abstract

Monte Carlo simulation methods for the valuation of financial instruments have become a staple of empirical economic analysis. A specific focus is dedicated to the feasibility of the stock price losses and barrier options as well as the sensitivity of partial time barrier options in dependence on their barrier values, which, to the best of our knowledge, hasn't been analysed in academic papers so far. This paper compares the performance of analytical results with empirical regression-based Monte Carlo outcomes, as proposed by Broadie et. al. (2015), where outer stage samples are used to generate financial risk factors and an inner stage simulation is applied to price the barrier options given the outer stage scenarios. Furthermore, potential correlation characteristics between portfolio pricing and loss regarding infinitesimal small changes in the underlying asset (Delta) are exhibited. Thus, a theoretical assumption approach to the explicit loss function is considered, as yet such an analytical loss function has not occurred in related literature.

Keywords: Barrier Option, Sensitivity, Delta, Loss, Monte-Carlo, Regression

Suggested Citation

Gabler, Andreas and Wiegand, Martin and Osterrieder, Joerg, Pricing, Loss and Sensitivity Analysis of Barrier Options via Regression (March 21, 2018). Available at SSRN: https://ssrn.com/abstract=3194111 or http://dx.doi.org/10.2139/ssrn.3194111

Andreas Gabler (Contact Author)

EBS Universität für Wirtschaft und Recht, EBS Business School, Students ( email )

Germany

Martin Wiegand

The University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Joerg Osterrieder

University of Twente ( email )

Drienerlolaan 5
Departement of High-Tech Business and Entrepreneur
Enschede, 7522 NB
Netherlands

Bern Business School ( email )

Brückengasse
Institute of Applied Data Sciences and Finance
Bern, BE 3005
Switzerland

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