FxBarrierOption scenario pricing

[elewan]

In BlackBarrierPriceFormulaRepository there are some conditions on spot vs barrier level relation, namely

ArgChecker.isFalse(isDown && spot <= barrier.getBarrierLevel(), "The Data is not consistent with an alive barrier (DOWN and spot<=barrier)."); ArgChecker.isFalse(!isDown && spot >= barrier.getBarrierLevel(),"The Data is not consistent with an alive barrier (UP and spot>=barrier).");

However, when pricing using scenario framework, I'd like to shift fx spot value, which might lead to shifted spot breaching a barrier (for example resulting in zero value in case of knock out). Instead a get a Failure result, which is unexpected.

[jodastephen]

For future reference, our primary channel for user questions is our forum.

Are you looking to just remove these two lines of validation?

[elewan]

If the barrier is Knock-Out than option value is 0, if barrier is Knock-In than option value is equals to value of vanilla option.

These validations should be replaced by following code

    if( (isDown && spot <= barrier.getBarrierLevel()) || (!isDown && spot >= barrier.getBarrierLevel())){
      if(isKnockIn){
        double df1 = Math.exp((costOfCarry-rate)*timeToExpiry);
        double df2 = Math.exp(-rate*timeToExpiry);
        double forward = spot*df1/df2;
        return BlackFormulaRepository.price(forward, strike, timeToExpiry, lognormalVol, isCall);
      }else{
        return 0d;
      }
    }

so that the following additional test in BlackBarrierPriceFormulaRepositoryTest passes

  public void barrierBreached(){
    double newSpot = 120;
    double callUpOut = BARRIER_PRICER.price(
            newSpot, STRIKE_MID, EXPIRY_TIME, COST_OF_CARRY, RATE_DOM, VOLATILITY, true, BARRIER_UP_OUT);
    assertEquals(callUpOut, 0d);

    double newForward = newSpot * DF_FOR / DF_DOM;
    double callUpIn = BARRIER_PRICER.price(
            newSpot, STRIKE_MID, EXPIRY_TIME, COST_OF_CARRY, RATE_DOM, VOLATILITY, true, BARRIER_UP_IN);
    double callVanilla = BlackFormulaRepository.price(newForward, STRIKE_MID, EXPIRY_TIME, VOLATILITY, true) ;
    assertEquals(callUpIn, callVanilla);
  }

[yukiiwashita]

The equivalent handling can be implemented in BlackFxSingleBarrierOptionProductPricer keeping the formula repositories purely mathematics.