Pricing the Exotic: Path-Dependent American Options with Stochastic Barriers

Publicado en

  • Latin American Journal of Central Banking


  • We develop a novel pricing strategy that approximates the value of an American option with exotic features through a portfolio of European options with different maturities. Among our findings, we show that: (i) our model is numerically robust in pricing plain vanilla American options; (ii) the model matches observed bids and premiums of multidimensional options that integrate ratchet, Asian, and barrier characteristics; and (iii) our closed-form approximation allows for an analytical solution of the option’s Greeks, which characterize the sensitivity to various risk factors. Finally, compared to the traditional Monte Carlo simulations method, we highlight that our estimation’s prediction is more accurate and requires less than 1% of the computational time.

fecha de publicación

  • 2021

Líneas de investigación

  • American Options
  • Asian Options
  • Barrier Options
  • Exotic Currency Options
  • Least Squares Monte Carlo
  • Option Pricing
  • Ratchet Options
  • Weighted Time Value Methodology


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