Pricing Weakly Model Dependent Barrier Products

TL;DR

This paper develops an almost model-independent pricing method for Bonus Certificates and Barrier Reverse-Convertible Structured Products with American barriers, reducing reliance on complex stochastic modeling by focusing on a key asymmetry parameter.

Contribution

It introduces a simplified pricing approach that minimizes stochastic model dependence for American barrier products, relying mainly on a single stochastic parameter.

Findings

Pricing accuracy within ±2/3 without stochastic models

Weak dependence of price on stochastic model details

Effective interpolation of market option prices for European barriers

Abstract

We discuss the pricing methodology for Bonus Certificates and Barrier Reverse-Convertible Structured Products. Pricing for a European barrier condition is straightforward for products of both types and depends on an efficient interpolation of observed market option pricing. Pricing products We discuss the pricing methodology for Bonus Certificates and Barrier Reverse-Convertible Structured Products. Pricing for a European barrier condition is straightforward for products of both types and depends on an efficient interpolation of observed market option pricing. Pricing products with an American barrier condition requires stochastic modelling. We show that for typical market parameters, this stochastic pricing problem can be systematically reduced to evaluating only one fairly simple stochastic parameter being the asymmetry of hitting the barrier. Eventually, pricing Bonus Certificates and Barrier Reverse Convertibles with an American barrier condition, shows to be dependent on stochastic modelling only within a range of $\pm\frac{2}{3}$ of accuracy - e.g. within this accuracy limitation we can price these products without stochastic modelling. We show that the remaining price component is weakly dependent on the stochastic models. Combining these together, we prove to have established an almost model independent pricing procedure for Bonus Certificates and Barrier Reverse-Convertible Structured Products with American barrier conditions.