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Monte Carlo SimulationsMethods in Pricing AmericanType Options
Halmstad University, School of Information Science, Computer and Electrical Engineering (IDE). Halmstad University, School of Information Science, Computer and Electrical Engineering (IDE), Halmstad Embedded and Intelligent Systems Research (EIS), MPE-lab. (Finance Mathematics)
2010 (English)Independent thesis Advanced level (degree of Master (One Year)), 15 credits / 22,5 HE creditsStudent thesis
Abstract [en]

The aim of this paper is to present simulation methods for the pricing of American financial instruments. Three methods are presented. Each differs from the others in it's approach to the problem and the method of finding a solution. We illustrate the variety of possible approaches that can be adopted when dealing with this complicated problem. The results of using these algorithms are compared with examples found in literature on the subject. We try to identify the factors that influence price estimators and provide some new results about the properties and distributions of those estimators. We show that even a simple variance reduction technique has a positive effect for these algorithms. The purpose of this paper is to present the effectiveness of a simulation method in pricing American options. This is contrary to the opinion often stated in articles and monographs that the simulation approach is not adequate for the task. We provide an overview and comparison of earlier methods proposed and follow this with an extended discussion. This paper sets the foundations for further research into use of these algorithms for multidimensional problems, where they may offer a substantial advantage over deterministic methods.

Place, publisher, year, edition, pages
2010. , p. 44
Keywords [en]
Monte Carlo
National Category
Computational Mathematics Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:hh:diva-13988OAI: oai:DiVA.org:hh-13988DiVA, id: diva2:376109
Presentation
2010-06-04, Haldasalen, Halmstad University, Halmstad, 09:55 (English)
Uppsok
Physics, Chemistry, Mathematics
Supervisors
Examiners
Available from: 2010-12-10 Created: 2010-12-10 Last updated: 2010-12-10Bibliographically approved

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CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf