DOI

10.17077/etd.6t7zg0ej

Document Type

Dissertation

Date of Degree

Spring 2018

Degree Name

PhD (Doctor of Philosophy)

Degree In

Statistics

First Advisor

Elias S. W. Shiu

First Committee Member

Kung-Sik Chan

Second Committee Member

Palle Jorgensen

Third Committee Member

Nariankadu D. Shyamalkumar

Fourth Committee Member

Osnat Stramer

Abstract

Barrier options have become increasingly popular financial instruments due to the lower costs and the ability to more closely match speculating or hedging needs. In addition, barrier options play a significant role in modeling and managing risks in insurance and finance as well as in refining insurance products such as variable annuities and equity-indexed annuities. Motivated by these immediate applications arising from actuarial and financial contexts, the thesis studies the pricing of barrier options and some exotic variations, assuming that the underlying asset price follows the Black-Scholes model or jump-diffusion processes. Barrier options have already been well treated in the classical Black-Scholes framework. The first part of the thesis aims to develop a new valuation approach based on the technique of exponential stopping and/or path counting of Brownian motions. We allow the option's boundaries to vary exponentially in time with different rates, and manage to express our pricing formulas properly as combinations of the prices of certain binary options. These expressions are shown to be extremely convenient in further pricing some exotic variations including sequential barrier options, immediate rebate options, multi-asset barrier options and window barrier options. Many known results will be reproduced and new explicit formulas will also be derived, from which we can better understand the impact on option values of various sophisticated barrier structures. We also consider jump-diffusion models, where it becomes difficult, if not impossible, to obtain the barrier option value in analytical form for exponentially curved boundaries. Our model assumes that the logarithm of the underlying asset price is a Brownian motion plus an independent compound Poisson process. It is quite common to assign a particular distribution (such as normal or double exponential distribution) for the jump size if one wants to pursue closed-form solutions, whereas our method permits any distributions for the jump size as long as they belong to the exponential family. The formulas derived in the thesis are explicit in the sense that they can be efficiently implemented through Monte Carlo simulations, from which we achieve a good balance between solution tractability and model complexity.

Keywords

Barrier options, Brownian motions, Jump diffusions, Monte Carlo method, Option pricing

Pages

xi, 135 pages

Bibliography

Includes bibliographical references (pages 130-135).

Copyright

Copyright © 2018 Xiao Wang

Share

COinS