Journal of Computational Finance

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Pricing barrier and average options in a stochastic volatility environment.

Kenichiro Shiraya, Akihiko Takahashi, Masashi Toda

ABSTRACT

A newapproximation method for pricing barrier and average options in a stochastic volatility environment by applying an asymptotic expansion approach is proposed in this paper. In particular, a high-order expansion scheme for general multidimensional diffusion processes is successfully applied. Moreover, the paper combines a static hedging method with the asymptotic expansion method for pricing barrier options. Finally, numerical examples show that the fourth-order or fifth-order asymptotic expansion scheme provides sufficiently accurate approximations using the stochastic(SABR) and -SABR models.

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