NAG Library Function Document
nag_barrier_std_price (s30fac)
1
Purpose
nag_barrier_std_price (s30fac) computes the price of a standard barrier option.
2
Specification
#include <nag.h> |
#include <nags.h> |
void |
nag_barrier_std_price (Nag_OrderType order,
Nag_CallPut option,
Nag_Barrier type,
Integer m,
Integer n,
const double x[],
double s,
double h,
double k,
const double t[],
double sigma,
double r,
double q,
double p[],
NagError *fail) |
|
3
Description
nag_barrier_std_price (s30fac) computes the price of a standard barrier option, where the exercise, for a given strike price, , depends on the underlying asset price, , reaching or crossing a specified barrier level, . Barrier options of type In only become active (are knocked in) if the underlying asset price attains the pre-determined barrier level during the lifetime of the contract. Those of type Out start active and are knocked out if the underlying asset price attains the barrier level during the lifetime of the contract. A cash rebate, , may be paid if the option is inactive at expiration. The option may also be described as Up (the underlying price starts below the barrier level) or Down (the underlying price starts above the barrier level). This gives the following options which can be specified as put or call contracts.
Down-and-In: the option starts inactive with the underlying asset price above the barrier level. It is knocked in if the underlying price moves down to hit the barrier level before expiration.
Down-and-Out: the option starts active with the underlying asset price above the barrier level. It is knocked out if the underlying price moves down to hit the barrier level before expiration.
Up-and-In: the option starts inactive with the underlying asset price below the barrier level. It is knocked in if the underlying price moves up to hit the barrier level before expiration.
Up-and-Out: the option starts active with the underlying asset price below the barrier level. It is knocked out if the underlying price moves up to hit the barrier level before expiration.
The payoff is
for a call or
for a put, if the option is active at expiration, otherwise it may pay a pre-specified cash rebate,
. Following
Haug (2007), the prices of the various standard barrier options can be written as shown below. The volatility,
, risk-free interest rate,
, and annualised dividend yield,
, are constants. The integer parameters,
and
, take the values
, depending on the type of barrier.
with
and where
denotes the cumulative Normal distribution function,
Down-and-In ():
- When , with ,
and with ,
When
, with
and with
,
Down-and-Out ():
- When , with ,
and with ,
When
, with
,
and with
,
Up-and-In ():
- When , with , ,
and with ,
When
, with
,
,
and with
,
Up-and-Out ():
- When , with , ,
and with ,
When
, with
,
,
and with
,
The option price is computed for each strike price in a set , , and for each expiry time in a set , .
4
References
Haug E G (2007) The Complete Guide to Option Pricing Formulas (2nd Edition) McGraw-Hill
5
Arguments
- 1:
– Nag_OrderTypeInput
-
On entry: the
order argument specifies the two-dimensional storage scheme being used, i.e., row-major ordering or column-major ordering. C language defined storage is specified by
. See
Section 3.3.1.3 in How to Use the NAG Library and its Documentation for a more detailed explanation of the use of this argument.
Constraint:
or .
- 2:
– Nag_CallPutInput
-
On entry: determines whether the option is a call or a put.
- A call; the holder has a right to buy.
- A put; the holder has a right to sell.
Constraint:
or .
- 3:
– Nag_BarrierInput
-
On entry: indicates the barrier type as
In or
Out and its relation to the price of the underlying asset as
Up or
Down.
- Down-and-In.
- Down-and-Out.
- Up-and-In.
- Up-and-Out.
Constraint:
, , or .
- 4:
– IntegerInput
-
On entry: the number of strike prices to be used.
Constraint:
.
- 5:
– IntegerInput
-
On entry: the number of times to expiry to be used.
Constraint:
.
- 6:
– const doubleInput
-
On entry: must contain
, the th strike price, for .
Constraint:
, where , the safe range parameter, for .
- 7:
– doubleInput
-
On entry: , the price of the underlying asset.
Constraint:
, where , the safe range parameter.
- 8:
– doubleInput
-
On entry: the barrier price.
Constraint:
, where , the safe range parameter.
- 9:
– doubleInput
-
On entry: the value of a possible cash rebate to be paid if the option has not been knocked in (or out) before expiration.
Constraint:
.
- 10:
– const doubleInput
-
On entry: must contain
, the th time, in years, to expiry, for .
Constraint:
, where , the safe range parameter, for .
- 11:
– doubleInput
-
On entry: , the volatility of the underlying asset. Note that a rate of 15% should be entered as 0.15.
Constraint:
.
- 12:
– doubleInput
-
On entry: , the annual risk-free interest rate, continuously compounded. Note that a rate of 5% should be entered as 0.05.
Constraint:
.
- 13:
– doubleInput
-
On entry: , the annual continuous yield rate. Note that a rate of 8% should be entered as 0.08.
Constraint:
.
- 14:
– doubleOutput
-
Note: where
appears in this document, it refers to the array element
- when ;
- when .
On exit: contains , the option price evaluated for the strike price at expiry for and .
- 15:
– NagError *Input/Output
-
The NAG error argument (see
Section 3.7 in How to Use the NAG Library and its Documentation).
6
Error Indicators and Warnings
- NE_ALLOC_FAIL
-
Dynamic memory allocation failed.
See
Section 2.3.1.2 in How to Use the NAG Library and its Documentation for further information.
- NE_BAD_PARAM
-
On entry, argument had an illegal value.
- NE_ENUM_REAL_2
-
On entry,
s and
h are inconsistent with
type:
and
.
- NE_INT
-
On entry, .
Constraint: .
On entry, .
Constraint: .
- NE_INTERNAL_ERROR
-
An internal error has occurred in this function. Check the function call and any array sizes. If the call is correct then please contact
NAG for assistance.
See
Section 2.7.6 in How to Use the NAG Library and its Documentation for further information.
- NE_NO_LICENCE
-
Your licence key may have expired or may not have been installed correctly.
See
Section 2.7.5 in How to Use the NAG Library and its Documentation for further information.
- NE_REAL
-
On entry, .
Constraint: and .
On entry, .
Constraint: .
On entry, .
Constraint: .
On entry, .
Constraint: .
On entry, .
Constraint: and .
On entry, .
Constraint: .
- NE_REAL_ARRAY
-
On entry, .
Constraint: .
On entry, .
Constraint: and .
7
Accuracy
The accuracy of the output is dependent on the accuracy of the cumulative Normal distribution function,
. This is evaluated using a rational Chebyshev expansion, chosen so that the maximum relative error in the expansion is of the order of the
machine precision (see
nag_cumul_normal (s15abc) and
nag_erfc (s15adc)). An accuracy close to
machine precision can generally be expected.
8
Parallelism and Performance
nag_barrier_std_price (s30fac) is threaded by NAG for parallel execution in multithreaded implementations of the NAG Library.
Please consult the
x06 Chapter Introduction for information on how to control and interrogate the OpenMP environment used within this function. Please also consult the
Users' Note for your implementation for any additional implementation-specific information.
None.
10
Example
This example computes the price of a Down-and-In put with a time to expiry of months, a stock price of and a strike price of . The barrier value is and there is a cash rebate of , payable on expiry if the option has not been knocked in. The risk-free interest rate is per year, there is an annual dividend return of and the volatility is per year.
10.1
Program Text
Program Text (s30face.c)
10.2
Program Data
Program Data (s30face.d)
10.3
Program Results
Program Results (s30face.r)