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- Title
LOCALIZED MONTE CARLO ALGORITHM TO COMPUTE PRICES OF PATH DEPENDENT OPTIONS ON TREES.
- Authors
FERRANDO, SEBASTIAN E.; BERNAL, ARIEL J.
- Abstract
A new simulation based algorithm to approximate prices of path dependent European options is introduced. The algorithm is defined for tree-like approximations to the underlying process and makes extensive use of structural properties of the discrete approximation. We indicate the advantages of the new algorithm in comparison to standard Monte Carlo algorithms. In particular, we prove a probabilistic error bound that compares the quality of both approximations. The algorithm is of general applicability and, for a large class of options, it has the same computational complexity as Monte Carlo.
- Subjects
EXOTIC options (Finance); DERIVATIVE securities; MONTE Carlo method; STOCK options; APPROXIMATION theory; OPTIONS (Finance)
- Publication
International Journal of Theoretical & Applied Finance, 2005, Vol 8, Issue 5, p553
- ISSN
0219-0249
- Publication type
Article
- DOI
10.1142/S0219024905003177