This thesis proposes a convenient method to price and hedge with a barrier option embedded Equity Linked Securities, combination of bonds and stock index and their payoffs are linked to the return of index such as KOSPI 200. In order to evaluate the barrier option parts of Equity Linked Securities use analytical closed form solution of Black-Scholes and Monte Carlo Simulation. This thesis compared a Monte Carlo Simulation with price calculated by the closed form solution.
Barrier options have discontinuous delta at barrier. For a knock-out, the option value is continuous, decreasing approximately linearly towards the barrier then being zero beyond the barrier. To hedge barrier option, this thesis uses dynamic delta hedging and analysis hedging performance. A simulation result shows that dynamic delta hedging through the barrier is certainly inefficient than standard option. The hedge performance measure is the ratio of the standard deviation of the cost of the hedging the option to the Black-Scholes price of the option. According to the simulation result, the more rebalance, the better hedge performance.
