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arXiv · 2109.02134

Semi-analytical pricing of barrier options in the time-dependent $λ$-SABR model

Andrey Itkin·Dmitry Muravey
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Abstract

We extend the approach of Carr, Itkin and Muravey, 2021 for getting semi-analytical prices of barrier options for the time-dependent Heston model with time-dependent barriers by applying it to the so-called $λ$-SABR stochastic volatility model. In doing so we modify the general integral transform method (see Itkin, Lipton, Muravey, Generalized integral transforms in mathematical finance, World Scientific, 2021) and deliver solution of this problem in the form of Fourier-Bessel series. The weights of this series solve a linear mixed Volterra-Fredholm equation (LMVF) of the second kind also derived in the paper. Numerical examples illustrate speed and accuracy of our method which are comparable with those of the finite-difference approach at small maturities and outperform them at high maturities even by using a simplistic implementation of the RBF method for solving the LMVF.

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Andrey Itkin, Dmitry Muravey. 2021-09-05. Semi-analytical pricing of barrier options in the time-dependent $λ$-SABR model. https://arxiv.org/abs/2109.02134

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