Multi-Asset Barrier Options Pricing by Collocation BEM (with Matlab® Code)

From Continuous to Discrete: Studies on Continuity Corrections and Monte Carlo Simulation with Applications to Barrier Options and American Options Menghui Cao This dissertation 1) shows continuity corrections for first passage probabilities of Brownian bridge and barrier joint probabilities, which are applied to the pricing of two-dimensional barrier and partial barrier options, and 2) introduces new variance reduction techniques and computational improvements to Monte Carlo methods for pricing American options. The joint distribution of Brownian motion and its first passage time has found applications in many areas, including sequential analysis, pricing of barrier options, and credit risk modeling. There are, however, no simple closed-form solutions for these joint probabilities in a discrete-time setting. Chapter 2 shows that, discrete two-dimensional barrier and partial barrier joint probabilities can be approximated by their continuous-time probabilities with remarkable accuracy after shifting the barrier away from the underlying by a factor of βσ √ ∆t. We achieve this through a uniform continuity correction theorem on the first passage probabilities for Brownian bridge, extending relevant results in Siegmund (1985a). The continuity corrections are applied to the pricing of two-dimensional barrier and partial barrier options, extending the results in Broadie, Glasserman & Kou (1997) on one-dimensional barrier options. One interesting aspect is that for type B partial barrier options, the barrier correction cannot be applied throughout one pricing formula, but only to some barrier values and leaving the other unchanged, the direction of correction may also vary within one

In linear poroelasticity so far only collocation boundary element methods have been available. However, in some applications, e.g., when coupling with finite elements is desired, a symmetric formulation is preferable. Choosing a Galerkin approach which involves the second boundary integral equation, such a formulation is possible. Here, a previously presented integration by part technique for the regularization of the first boundary integral equation is extended to the second boundary integral equation as well. While the weakly singular representation of the double layer operator has been presented before, the emphasis lies here on the so called hyper‐singular boundary integral operator. Due to the regularization, this operator can be evaluated numerically and, hence, be used within a numerical scheme for the first time. Different numerical studies will be presented to show the behavior of the established symmetric Galerkin boundary element method, also comparing it with collocation boundary element methods. (© 2011 Wiley‐VCH Verlag GmbH & Co. KGaA, Weinheim)

To solve boundary integral equations for potential problems using collocation Boundary Element Method (BEM) on smooth curved 3D geometries, an analytical singularity extraction technique is employed. By adopting the isoparametric approach, curved geometries that are represented by mapped rectangles or triangles from the parametric domain are considered. The singularity extraction on the governing singular integrals can be performed either as an operation of subtraction or division, each having some advantage.A particular series expansion of a singular kernel about a source point is investigated. The series in the parametric coordinates consists of functions of a type Rpxqyr, where R is a square root of a quadratic bivariate homogeneous polynomial with coefficients corresponding to the first fundamental form of a smooth surface, and p,q,r are integers, satisfying p≤−1 and q,r≥0. By extracting more terms from the series expansion of the singular kernel, the smoothness of the regularized kernel at the source point can be increased. Analytical formulae for integrals of such terms are obtained from antiderivatives of Rpxqyr, using recurrence formulae, and by evaluating them at the edges of rectangular or triangular parametric domains.Numerical tests demonstrate that the singularity extraction technique can be a useful prerequisite for a numerical quadrature scheme to obtain high order of convergence for the governing singular integrals in 3D collocation BEM with respect to the number of quadrature nodes or with respect to size of the discretization mesh cells.

The consistent boundary element method for potential and elasticity: Part II — machine-precision numerical evaluations for 2D problems

Implementation of the modified Monte Carlo simulation for evaluate the barrier option prices

Evaluation of surface electric fields, which is well described by Poisson equation, is of great importance on many occasions in power system. This paper proposes a boundary element method for long slender conductors. Examples show the method is convergent and shows great potential for the evaluation of electric field generated by slender conductors.

Pricing Bounds on Barrier Options

Solutions of 2D and 3D non-homogeneous potential problems by using a boundary element-collocation method

Coupon bond European and barrier options are financial derivatives that can be analyzed in the Hamiltonian formulation of quantum finance. Forward interest rates are modeled as a two-dimensional quantum field theory and its Hamiltonian and state space is defined. European and barrier options are realized as transition amplitudes of the time integrated Hamiltonian operator. The double barrier option for a financial instrument is "knocked out" (terminated with zero value) if the price of the underlying instrument exceeds or falls below preset limits; the barrier option is realized by imposing boundary conditions on the eigenfunctions of the forward interest rates' Hamiltonian. The price of the European coupon bond option and the zero coupon bond barrier option are calculated. It is shown that, is general, the constraint function for a coupon bond barrier option can -- to a good approximation -- be linearized. A calculation using an overcomplete set of eigenfunctions yields an approximate price for the coupon bond barrier option, which is given in the form of an integral of a factor that results from the barrier condition times another factor that arises from the payoff function.

An efficient option pricing method based on Fourier-cosine expansions was presented by Fang and Oosterlee for European options in 2008, and later, this method was also used by them to price early-exercise options and barrier options respectively, in 2009. In this paper, this method is applied to price discretely American barrier options in which the monitored dates are many times more than the exercise dates. The corresponding algorithm is presented to practical option pricing. Numerical experiments show that this algorithm works very well and efficiently for different exponential Levy asset models.

Barrier option pricing under the 2-hypergeometric stochastic volatility model

Poroelasticity is concerned with heterogeneous media consisting of an elastic solid skeleton saturated by a diffusing pore fluid. Its range of application covers a variety of important real-life problems, such as design of nuclear reactor cores, exploitation of oil or gas deposits, simulation of living bone behaviour for orthopedical surgery, control of filtration leakage from reservoirs, and manufacturing process design for composite materials. Poroelasticity is now the subject of a fairly abundant literature, stemming from Terzaghi’s concept of effective stress and Biot’s linear consolidation theory. From a computational mechanics point of view, poroelastic analysis has been conducted using either the finite element method or the traditional (collocation) boundary element method [1–3].

In electrocardiographic imaging, epicardial potentials are reconstructed computationally from electrocardiographic measurements. The reconstruction is typically done with the help of the boundary element method (BEM), using the point collocation weighting and constant or linear basis functions. In this paper, we evaluated the performance of constant and linear point collocation and Galerkin BEMs in the epicardial potential problem. The integral equations and discretizations were formulated in terms of the single- and double-layer operators. All inner element integrals were calculated analytically. The computational methods were validated against analytical solutions in a simplified geometry. On the basis of the validation, no method was optimal in all testing scenarios. In the forward computation of the epicardial potential, the linear Galerkin (LG) method produced the smallest errors. The LG method also produced the smallest discretization error on the epicardial surface. In the inverse computation of epicardial potential, the electrode-specific transfer matrix performed better than the full transfer matrix. The Tikhonov 2 regularization outperformed the Tikhonov 0. In the optimal modeling conditions, the best BEM technique depended on electrode positions and chosen error measure. When large modeling errors such as omission of the lungs were present, the choice of the basis and weighting functions was not significant.

Author index of volume 144

The pricing and static hedging of multi-step double barrier options