A Note on Simulation Pricing of ? -Options

Zbigniew Palmowski and Tomasz Serafin
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Zbigniew Palmowski: Faculty of Pure and Applied Mathematics, Wrocław University of Science and Technology, ul. Wyb. Wyspiańskiego 27, 50-370 Wrocław, Poland

Risks, 2020, vol. 8, issue 3, 1-19

Abstract: In this work, we adapt a Monte Carlo algorithm introduced by Broadie and Glasserman in 1997 to price a π -option. This method is based on the simulated price tree that comes from discretization and replication of possible trajectories of the underlying asset’s price. As a result, this algorithm produces the lower and the upper bounds that converge to the true price with the increasing depth of the tree. Under specific parametrization, this π -option is related to relative maximum drawdown and can be used in the real market environment to protect a portfolio against volatile and unexpected price drops. We also provide some numerical analysis.

Keywords: ? -option; American-type option; optimal stopping; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:8:y:2020:i:3:p:90-:d:405414

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