The Barrier option pricing engine uses Monte Carlo Simulation method to estimate the payoff of barrier option. Here, we assume the process of asset pricing applies to Black-Scholes process.
Barrier option is a kind of option whose payoff depends on whether the option is effective at the maturity time. Only when the option is effective, the holder of the option has the right, but not the obligation, to buy/sell the underlying asset at the strike price. If the option is effective, the payoff of it will be calculated as the European Option.
There are four barrier option types, including:
- ‘UpIn’: The option becomes effective when the price of the underlying asset is greater than the barrier value.
- ‘UpOut’: The option becomes ineffective when the price of the underlying asset is greater than the barrier value.
- ‘DownIn’: The option becomes effective when the price of the underlying asset is less than the barrier value.
- ‘DownOut’: The option becomes ineffective when the price of the underlying asset is less than the barrier value.
The rebate is a fixed value which is paid when the option is ineffective.
Note
In our implementation, barrier option means continuous and single barrier option. That is to say, the barrier event could happen at any time during the lifetime of option.