Note on simulation pricing of $\pi$-options

Zbigniew Palmowski and Tomasz Serafin

Papers from arXiv.org

Abstract: In this work, we adapt a Monte Carlo algorithm introduced by Broadie and Glasserman (1997) to price a $\pi$-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 $\pi$-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.

Date: 2020-07, Revised 2020-08
New Economics Papers: this item is included in nep-cmp and nep-rmg
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