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

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

I was thinking to handle the same way but wanted confirmation from some
expert. Thanks a lot for help.

I will open an issue in the github so that some code expert can fix it in
future.

Regards,
Ashish

On Tue, 21 Jun 2022 at 02:36, Jonathan Sweemer <sw...@gm...> wrote:

> If the product knocks in or out during its lifetime then it is no longer
> the same product - in the case of the knock-out it becomes nothing and in
> the case of the knock-in it becomes a regular option and should be priced
> as such. Your position management system should be able to handle these
> lifecycle events so that you see the right positions in your book.
>
> Having said that, I still think it could make sense to improve the
> validations on these barrier products to provide better error messages in
> case of invalid inputs.
>
>
> 2022년 6월 20일 (월) 22:50, Ashish Bansal <ash...@gm...>님이 작성:
>
>> 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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>>>>>