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Modelling exchange-traded barrier options traded in the Australian options market

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Abstract:

Abstract

Barrier options traded in the Australian market vary considerably in terms of the extent to which the barrier is monitored and in terms of the location of the barrier level relative to the exercise price. This paper examines the impact of these differences on prices and also on deltas and gammas. We find that it is not possible to generalize results concerning hedge parameter values to all barrier options. We find that options examined by Easton et al. (2004) do not display discontinuity of deltas at the barrier levels and that their apparent overpricing cannot be attributed to hedging difficulties.

Keywords: Barrier monitoring; Barrier options; G13; Hedging

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1467-629X.2006.00198.x

Affiliations: 1: University of Newcastle, Callaghan, 2308, Australia 2: University of Sydney, Sydney, 2006, Australia

Publication date: March 1, 2007

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