Pricing a Path-dependent American Option by Monte Carlo Simulation
AbstractIn this paper, we evaluate anytime Bermudan options, a class of path-dependent American options, by Monte Carlo simulation. Assuming that the state variable is Markovian, we show that the price of the path-dependent American option satisfies a dynamic programming equation. The continuation value in the dynamic programming is represented by a conditional expectation. It is shown that the conditional expectation can be converted to an uncoditional expectation, using the Malliavin Calculus, which in turn enables us to evaluate the price by Monte Carlo simulation. Some numerical examples are given to demonstrate the usefulness of our method
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 293.
Date of creation: 11 Aug 2004
Date of revision:
Anytime Bermudan option; Malliavin Calculus;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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