AN APPROXIMATION METHOD FOR PRICING CONTINUOUS BARRIER OPTIONS UNDER MULTI-ASSET LOCAL STOCHASTIC VOLATILITY MODELS

Abstract

This paper presents a new approximation method for pricing multi-asset continuous single-barrier options. Barrier options are frequently traded, and it is necessary for practitioners to evaluate these precisely and quickly, both for competitiveness, and for risk management. However, it is a difficult task under local stochastic volatility models. To the best of our knowledge, this paper is the first to provide an analytical approximation for continuous barrier options prices in a multi-asset environment. In numerical experiments, we examine the validity of the formula by using parameters calibrated to EURUSD European options.