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Conditional sampling for barrier option pricing under the LT method

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  • Nico Achtsis
  • Ronald Cools
  • Dirk Nuyens
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    Abstract

    We develop a conditional sampling scheme for pricing knock-out barrier options under the Linear Transformations (LT) algorithm from Imai and Tan (2006). We compare our new method to an existing conditional Monte Carlo scheme from Glasserman and Staum (2001), and show that a substantial variance reduction is achieved. We extend the method to allow pricing knock-in barrier options and introduce a root-finding method to obtain a further variance reduction. The effectiveness of the new method is supported by numerical results.

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    File URL: http://arxiv.org/pdf/1111.4808
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1111.4808.

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    Date of creation: Nov 2011
    Date of revision: Dec 2012
    Handle: RePEc:arx:papers:1111.4808

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    Web page: http://arxiv.org/

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    1. Mark Joshi & Robert Tang, 2010. "Pricing And Deltas Of Discretely-Monitored Barrier Options Using Stratified Sampling On The Hitting-Times To The Barrier," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(05), pages 717-750.
    2. Pierre L'Ecuyer & Christiane Lemieux, 2000. "Variance Reduction via Lattice Rules," Management Science, INFORMS, vol. 46(9), pages 1214-1235, September.
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