Re: [Quantlib-users] Queries on the impact of barrier hit on Barrier pricing

[Ashish B. <ash...@gm...>]

I am not pricing with barrier breach on the inception day.

Assuming the trade started out of barrier limit, i.e. higher than barrier
for DI and DO type, I am pricing during the life of trade. During life the
underlying could move knocking the barrier. The code starts showing error
after the breach.

I am looking to improve code so that during life of trade it shows right
price output instead of error.

Ashish

On Mon, Jun 20, 2022, 4:16 PM Jonathan Sweemer <sw...@gm...> wrote:

> I can reproduce the exception that you're seeing. As for the explanation,
> I'm not an expert in this code, but here's my take on it:
>
> 1. for Down-Out, when I pass the spot less than the barrier, I get
>> RunTimeerror for interpolation range. Should I block the pricing at all in
>> this case? Can't the engine handle it?
>
> Generally you'd expect a down-and-out call to be quoted with spot above
> the barrier, so starting with spot below the barrier is kind of a
> degenerate case, as the product knocks out before it even starts, so I
> believe the exception is warranted (though perhaps not as informative as it
> could be).
>
> 2. For Down-in, I am getting the same error whereas the option gets
>> activated and is still live then why is this not priced by the engine? Am
>> I doing something wrong?
>
> Similar to question 1, you'd expect a down-and-in call to be quoted with
> spot above the barrier, but in this case I agree that a case can be made
> for the product to be live (i.e. knocked-in at inception), although it
> would probably depend on the specific deal terms how to handle this case.
> If you have any such deal terms to refer to, then you might want to submit
> a pull request to handle them accordingly in the code.
>
>
>
> On Mon, Jun 20, 2022 at 5:11 PM Ashish Bansal <ash...@gm...>
> wrote:
>
>> Following is the code that I am using to evaluate the barrier option.
>> Here if I pass the spot which has crossed the barrier for knock-in or
>> knock-out options, I get an error. The down-out is in the code and for
>> down-in, I took the example given in row# 266 of with spot price as 94 from:
>>
>> https://github.com/lballabio/QuantLib/blob/master/test-suite/barrieroption.cpp
>>
>> My python code:
>>
>> ############################################################################
>> import QuantLib as ql
>>
>> # Setting Barrier option parameters
>> calculation_date = ql.Date(1, 6, 2021)
>> maturity_date = ql.Date(25, 11, 2021)
>> spot_price = 577.0
>> strike_price = 770.0
>> volatility = 43.56/100
>> option_type = ql.Option.Call
>> risk_free_rate = 0.175/100
>> barrier_price = 400.0
>> barrier_type = ql.Barrier.DownOut
>> rebate = 0 # no rebate
>> day_count = ql.Actual365Fixed()
>> calendar = ql.TARGET()
>>
>>
>> marketpremium = 18.64
>>
>> ql.Settings.instance().evaluationDate = calculation_date
>>
>> # Constructing the EU option in QL
>> payoff = ql.PlainVanillaPayoff(option_type, strike_price)
>> eu_exercise = ql.EuropeanExercise(maturity_date)
>> barrier_eu_option =
>> ql.BarrierOption(barrier_type,barrier_price,rebate,payoff, eu_exercise)
>>
>> # The Black-Scholes-Merton process is constructed
>> spot_handle = ql.QuoteHandle(
>> ql.SimpleQuote(spot_price)
>> )
>> flat_rate_ts = ql.YieldTermStructureHandle(
>> ql.FlatForward(calculation_date,
>>   risk_free_rate,
>>   day_count)
>> )
>> flat_vol_ts = ql.BlackVolTermStructureHandle(
>> ql.BlackConstantVol(calculation_date,
>> calendar,
>> volatility,
>> day_count)
>> )
>> bs_process = ql.BlackScholesProcess(spot_handle,
>>   flat_rate_ts,
>>   flat_vol_ts)
>>
>> # compute the theoretical price using the AnalyticEuropeanEngine
>>
>> barrier_eu_option.setPricingEngine(ql.FdBlackScholesBarrierEngine(bs_process))
>> br_eu_price = barrier_eu_option.NPV()
>> print("The theoretical price for  EU barrier is %lf" % br_eu_price)
>>
>> ############################################################################
>>
>> Regards,
>> Ashish
>>
>> On Fri, 17 Jun 2022 at 02:40, Jonathan Sweemer <sw...@gm...> wrote:
>>
>>> Hi Ashish, can you share your code or a link to it?
>>>
>>> 2022년 6월 17일 (금) 03:35, Ashish Bansal <ash...@gm...>님이 작성:
>>>
>>>> Hi,
>>>>
>>>> Any guidance on this error in barriers?
>>>>
>>>> Regards,
>>>> Ashish
>>>>
>>>> On Tue, 14 Jun 2022 at 13:03, Ashish Bansal <ash...@gm...>
>>>> wrote:
>>>>
>>>>> Dear team,
>>>>>
>>>>> I need some guidance on the pricing of the barrier option using
>>>>> the FdBlackScholesBarrierEngine in the event that the barrier is hit:
>>>>> 1. for Down-Out, when I pass the spot less than the barrier, I get
>>>>> RunTimeerror for interpolation range. Should I block the pricing at all in
>>>>> this case? Can't the engine handle it?
>>>>> 2. For Down-in, I am getting the same error whereas the option gets
>>>>> activated and is still live then why is this not priced by the engine? Am
>>>>> I doing something wrong?
>>>>>
>>>>> What is the difference between FdBlackScholesBarrierEngine
>>>>> and AnalyticBarrierEngine? I compared a few results and found a slight
>>>>> difference in values. Any suggestion on which one to use?
>>>>>
>>>>> Any help would be appreciated.
>>>>>
>>>>> Thanks
>>>>> Ashish
>>>>>
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>>>