Monte Carlo Simulation of an American Option

Journal of Systemics, Cybernetics and Informatics. 2007;5(2):57-61

 

Journal Homepage

Journal Title: Journal of Systemics, Cybernetics and Informatics

ISSN: 1690-4532 (Print); 1690-4524 (Online)

Publisher: International Institute of Informatics and Cybernetics

Society/Institution: HTML Web Page

LCC Subject Category: Technology: Technology (General): Industrial engineering. Management engineering: Information technology | Language and Literature: Philology. Linguistics: Communication. Mass media

Country of publisher: United States

Language of fulltext: English

Full-text formats available: PDF

 

AUTHORS

Gikiri Thuo

EDITORIAL INFORMATION

Double blind peer review

Editorial Board

Instructions for authors

Time From Submission to Publication: 12 weeks

 

Abstract | Full Text

We implement gradient estimation techniques for sensitivity analysis of option pricing which can be efficiently employed in Monte Carlo simulation. Using these techniques we can simultaneously obtain an estimate of the option value together with the estimates of sensitivities of the option value to various parameters of the model. After deriving the gradient estimates we incorporate them in an iterative stochastic approximation algorithm for pricing an option with early exercise features. We illustrate the procedure using an example of an American call option with a single dividend that is analytically tractable. In particular we incorporate estimates for the gradient with respect to the early exercise threshold level.