Monte Carlo Option Pricing

Cecilia Maya Ochoa ()
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Cecilia Maya Ochoa: Universidad Eafit, Postal: Escuela de Administración, Universidad EAFIT, bloque 26, oficina 509, Medellín, Colombia

Lecturas de Economía, 2004, issue 61, 53-70

Abstract: The Monte Carlo method is applied to various cases of financial option pricing. Its performance is satisfactory in terms of accuracy when it is compared to other numerical methods. The precision of the estimates provided by Crude Monte Carlo can be improved by implementing variance reduction techniques such as antithetic variate and control variate. However, the use of these techniques implies a greater computational effort; thus, there is a trade-off between a lower variance estimator and a higher computational requirement which demands us to check not only for the accuracy of the estimator but also for its efficiency.

Keywords: Monte Carlo Method; Option Pricing; Financial Options; Numerical Methods (search for similar items in EconPapers)
JEL-codes: C15 G12 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (1)

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