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Monte Carlo Option Pricing

Author

Listed:
  • Cecilia Maya Ochoa

    (Universidad Eafit)

Abstract

The Monte Carlo method is applied to various cases of financial option pricing. Its performance is satisfactory in terms of accuracy when it is compared to other numerical methods. The precision of the estimates provided by Crude Monte Carlo can be improved by implementing variance reduction techniques such as antithetic variate and control variate. However, the use of these techniques implies a greater computational effort; thus, there is a trade-off between a lower variance estimator and a higher computational requirement which demands us to check not only for the accuracy of the estimator but also for its efficiency.

Suggested Citation

  • Cecilia Maya Ochoa, 2004. "Monte Carlo Option Pricing," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 61, pages 53-70, Julio-Dic.
    • Handle: RePEc:lde:journl:y:2004:i:61:p:53-70
    as

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    File URL: https://revistas.udea.edu.co/index.php/lecturasdeeconomia/issue/view/326
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    References listed on IDEAS

    as
    1. Geske, Robert & Shastri, Kuldeep, 1985. "Valuation by Approximation: A Comparison of Alternative Option Valuation Techniques," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(1), pages 45-71, March.
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    Cited by:

    1. Kabby, Williams, 2022. "The valuation of barrier options prices : A methods review," MPRA Paper 117460, University Library of Munich, Germany, revised 12 Aug 2022.

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    More about this item

    Keywords

    Monte Carlo Method; Option Pricing; Financial Options; Numerical Methods;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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