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Monte Carlo Option Pricing

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  • Cecilia Maya Ochoa

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    (Universidad Eafit)

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    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.

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    Bibliographic Info

    Article provided by Universidad de Antioquia, Departamento de Economía in its journal LECTURAS DE ECONOMÍA.

    Volume (Year): (2004)
    Issue (Month): 61 (Julio-Diciembre)
    Pages: 53-70

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    Handle: RePEc:lde:journl:y:2004:i:61:p:53-70

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    Postal: Lecturas de Economía, Departamento de Economía, Calle 67, 53-108, Medellin 050010, Colombia.

    Related research

    Keywords: Monte Carlo Method; Option Pricing; Financial Options; Numerical Methods;

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    1. Geske, Robert & Shastri, Kuldeep, 1985. "Valuation by Approximation: A Comparison of Alternative Option Valuation Techniques," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(01), pages 45-71, March.
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