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Interest Rate Barrier Options

  • Giovanni Barone-Adesi
  • Ghulam Sorwar
Part of the Applied Optimization book series (APOP, volume 74)

Abstract

Less expensive than standard options, barrier options have become very popular in recent years as useful hedging instruments for risk management strategies. Thus far valuation approaches have largely focused on equity barrier options, where in certain instances analytical expressions may be available. In this paper we use Monte Carlo procedure to value barrier options based on the Chan, Karolyi, Longstaff and Sanders interest rate process. By performing simulations with and without including the recently suggested Sharp Large Deviations, we show that standard Monte Carlo procedure substantially misprices barrier options.

Keywords

Interest rate options barrier options Monte-Carlo simulation 

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Copyright information

© Springer Science+Business Media Dordrecht 2002

Authors and Affiliations

  • Giovanni Barone-Adesi
    • 1
    • 2
  • Ghulam Sorwar
    • 3
  1. 1.Facoltà di EconomiaUniversità della Svizzera ItalianaLuganoSwitzerland
  2. 2.City University Business SchoolLondonUK
  3. 3.Cardiff Business School Cardiff UniversityWalesUK

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