A NEW MONTE CARLO METHOD FOR AMERICAN OPTIONS

G. N. Milstein (), O. REIß () and J. Schoenmakers ()
Additional contact information
G. N. Milstein: Ural State University, Lenin Street 51, 620083 Ekaterinburg, Russia
O. REIß: IKB Deutsche Industriebank AG, Wilhelm-Bötzkes-Strasse 1, D-40474 Düsseldorf, Germany
J. Schoenmakers: Weierstrass Institute for Applied Analysis and Stochastics, Mohrenstr. 39, 10117 Berlin, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2004, vol. 07, issue 05, 591-614

Abstract: We introduce a new Monte Carlo method for constructing the exercise boundary of an American option in a generalized Black–Scholes framework. Based on a known exercise boundary, it is shown how to price and hedge the American option by Monte Carlo simulation of suitable probabilistic representations in connection with the respective parabolic boundary value problem. The method presented is supported by numerical experiments.

Keywords: Pricing and hedging of American options; Monte Carlo simulation; determination of the exercise boundary; 60H30; 65C30; 91B28 (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1142/S0219024904002554

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