Barrier Options: Pricing

Barrier options are path-dependent, and as a result pricing them can sometimes be problematic. Here we look at some pricing methods available to practitioners, including some analytical variations of the Black-Scholes-Merton method. We then investigate issues that may arise when using lattice methods to price barrier options, and look at the adaptive mesh tree as a means of circumventing the problems. We finish up with a discussion of Monte Carlo simulations, and using models where volatility is variable.