Efficient estimation of option price and price sensitivities via structured database Monte Carlo (SDMC)

Authors:
Gang Zhao;Tarik Borogovac;Pirooz Vakili
Affiliations:
Boston University, Brookline, MA;Boston University, Boston, MA;Boston University, Brookline, MA
Venue:
Proceedings of the 39th conference on Winter simulation: 40 years! The best is yet to come
Year:
2007

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Abstract

We describe how to develop generic efficient simulation algorithms for estimating price and price sensitivities (the Greeks) of financial options using the Structured Database Monte Carlo (SDMC) approach. These algorithms are based on stratification, control variate and a combination of the two in an SDMC setting. Experimental results and some discussion of the effectiveness of the approach are provided. The algorithms also serve as illustrations of the basic approach of developing variance reduction algorithms in an SDMC setting that are not necessarily limited to stratification and control variate techniques.