Tid: 15 december 2010 kl 09.15-10.00.

Plats : Seminarierummet 3721, Institutionen för matematik, KTH, Lindstedts väg 25. (observera dagen och lokalen), Karta!

Föredragshållare: Mert Camlibel och Johan Lundgren

Titel: Investigation of the effect of using stochastic and local volatility when pricing barrier options (Examensarbete – Master thesis)

Abstract

The main purpose of this thesis is to price barrier options using local and stochastic volatility and compare the results to option prices retrieved using Merton, Reiner and Rubinstein's analytical expressions for barrier options. For the stochastic volatility we use the SABR model and to implement the local volatility we use Tikhonov regularization and the Crank-Nicholson scheme. The models are calibrated to European call options based on the S&P 500 index from October 1995. Our results show that the barrier option prices under local and stochastic volatility coincide. However, we find that these prices differ significantly from the analytical prices for barrier options with barrier levels far away from the spot price.

The full report (pdf)

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