Abstract
The pricing of barrier options is a unique problem faced by the financial world since the options depend on the path taken by their underlying asset's spot price. The methods of pricing these exotic options include computationally heavy analytical models that often require specific considerations for each of the different possible option types, as well as approximate correction factors, that often make them impractical. To determine the fair price of a barrier option in a practical, computationally efficient setting, in this study, we propose to develop a simulation-based discrete-event modelling framework considering the impacts of inherent interactions between an option's underlying asset and the market. Considering this, the underlying asset's price is split into two components where the first one represents the behaviour of the market and the second one represents the behaviour of the underlying asset that is independent from the market. The proposed framework has been employed to establish the fair price of options on the stocks of BHP, POT and RIO. It has been demonstrated that 45.5%, 32% and 38% of the price of the option is driven solely by the behaviour of the market for options on BHP, POT and RIO, respectively.