A Boundary Element Formulation for the Pricing of Barrier Options

Shih-Yu Shen, Yi-Long Hsiao
2013 Open Journal of Modelling and Simulation  
In this article, we derive a boundary element formulation for the pricing of barrier option. The price of a barrier option is modeled as the solution of Black-Scholes' equation. Then the problem is transformed to a boundary value problem of heat equation with a moving boundary. The boundary integral representation and integral equation are derived. A boundary element method is designed to solve the integral equation. Special quadrature rules for the singular integral are used. A numerical
more » ... e is also demonstrated. This boundary element formulation is correct.
doi:10.4236/ojmsi.2013.13006 fatcat:4qvxlkn4m5chvg7uzdavodnt5y