Pricing Barrier and Average Options Under Stochastic Volatility Environment

Kenichiro Shiraya, Akihiko Takahashi, Masashi Toda
2009 Social Science Research Network  
This paper proposes a new approximation method of pricing barrier and average options under stochastic volatility environment by applying an asymptotic expansion approach. In particular, a high-order expansion scheme for general multi-dimensional diffusion processes is effectively applied. Moreover, the paper combines a static hedging method with the asymptotic expansion method for pricing barrier options. Finally, numerical examples show that the fourth or fifth-order asymptotic expansion
more » ... e provides sufficiently accurate approximations under the λ-SABR and SABR models.
doi:10.2139/ssrn.1491937 fatcat:wood54qspfau3pt735qtmuaohq