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Author NameHu, Junling
TitleBarrier Option Pricing under SABR Model Using Monte Carlo Methods
DepartmentMathematical Sciences
  • Stephan Sturm, Advisor
  • Keywords
  • Barrier Option
  • SABR
  • Black-Scholes
  • Monte Carlo
  • Date of Presentation/Defense2013-05-03
    Availability unrestricted


    The project investigates the prices of barrier options from the constant underlying volatility in the Black-Scholes model to stochastic volatility model in SABR framework. The constant volatility assumption in derivative pricing is not able to capture the dynamics of volatility. In order to resolve the shortcomings of the Black-Scholes model, it becomes necessary to find a model that reproduces the smile effect of the volatility. To model the volatility more accurately, we look into the recently developed SABR model which is widely used by practitioners in the financial industry.

    Pricing a barrier option whose payoff to be path dependent intrigued us to find a proper numerical method to approximate its price. We discuss the basic sampling methods of Monte Carlo and several popular variance reduction techniques. Then, we apply Monte Carlo methods to simulate the price of the down-and-out put barrier options under the Black-Scholes model and the SABR model as well as compare the features of these two models.

  • jhu_SABR.pdf

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