Pricing of financial derivatives via simulation
WSC '95 Proceedings of the 27th conference on Winter simulation
New advances and applications of combining simulation and optimization
WSC '96 Proceedings of the 28th conference on Winter simulation
Path-dependent options: extending the Monte Carlo simulation approach
Management Science
Options pricing: using simulation for option pricing
Proceedings of the 32nd conference on Winter simulation
Proceedings of the 39th conference on Winter simulation: 40 years! The best is yet to come
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Monte Carlo simulation can be readily applied to asset pricing problems with multiple state variables and possible path dependencies because convergence of Monte Carlo methods is independent of the number of state variables. This paper applies Monte Carlo simulation to the problem of determining free exercise boundaries for pricing American-style options. We use a simulation-optimization method to identify approximately optimal exercise thresholds that are defined by a minimal number of parameters. We demonstrate that asset prices calculated using this method are comparable to those found using other numerical asset pricing methods.