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Monte Carlo Evaluation Of American Options Using Consumption Processes



    (Weierstrass Institute for Applied Analysis and Stochastics, Mohrenstr.39, D-10117 Berlin, Germany)



    (Department of Mathematics, Ural State University, Lenin Str. 51, 620083 Ekaterinburg, Russia)

We develop a new approach for pricing both continuous-time and discrete-time American options which is based on the fact that any American option is equivalent to a European one with a consumption process involved. This approach admits the construction of an upper bound (a lower bound) on the true price using some lower bound (an upper bound) by Monte Carlo simulation. A number of effective estimators of upper and lower bounds with the reduced variance are proposed. The method is supported by numerical experiments which look promising.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 09 (2006)
Issue (Month): 04 ()
Pages: 455-481

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Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:04:p:455-481
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