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Using the continuous price as control variate for discretely monitored options

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  • Dingeç, Kemal Dinçer
  • Hörmann, Wolfgang

Abstract

Variance reduction is of highest importance in financial simulation. In this study, we present a new and simple variance reduction technique for pricing discretely monitored lookback and barrier options. It is based on using the corresponding continuously monitored option as external control variate. To obtain the value of the continuously monitored price both, conditional simulation and conditional expectation can be utilized. From numerical experiments we can conclude that the efficiency gains obtained by our new method are significant.

Suggested Citation

  • Dingeç, Kemal Dinçer & Hörmann, Wolfgang, 2011. "Using the continuous price as control variate for discretely monitored options," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 82(4), pages 691-704.
    • Handle: RePEc:eee:matcom:v:82:y:2011:i:4:p:691-704
    DOI: 10.1016/j.matcom.2011.09.007
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    References listed on IDEAS

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    1. Paul Glasserman & Jeremy Staum, 2001. "Conditioning on One-Step Survival for Barrier Option Simulations," Operations Research, INFORMS, vol. 49(6), pages 923-937, December.
    2. Mark Broadie & Paul Glasserman & Steven Kou, 1997. "A Continuity Correction for Discrete Barrier Options," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 325-349, October.
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    Cited by:

    1. Dingeç, Kemal Dinçer & Hörmann, Wolfgang, 2012. "A general control variate method for option pricing under Lévy processes," European Journal of Operational Research, Elsevier, vol. 221(2), pages 368-377.

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