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Been lurking this forum for quite some time and there’s this concept I can’t wrap my head around:

How does the inclusion of stochastic volatility in option pricing models impact the valuation of exotic options, such as barrier options and Asian options?

Can anyone share some good literature? Especially w.r.t. numerical approximations for these types of options under stochastic volatility, would be highly appreciated.

Hope someone can help.

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Check out https://www.sciencedirect.com/science/article/pii/S0898122112003215 for barriers, think some searching could yield similar papers for Asian options.

In practice this kind of stuff is mostly done using MC simulations where individual input parameters to the price are simulated according to the assumptions of the Heston SV model.

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  • $\begingroup$ Thx for this, is there any closed-form solution for these types of exotics under those market conditions? $\endgroup$
    – Ward Brink
    Jul 8 at 10:07
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    $\begingroup$ It would be best if you can expand your answer with sufficient detail so that it can still be as useful and understood in case the link you have provided gets broken or changed. $\endgroup$
    – Alper
    Jul 8 at 15:49

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