Conditional sampling for barrier option pricing under the LT method
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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Pierre L'Ecuyer & Christiane Lemieux, 2000. "Variance Reduction via Lattice Rules," Management Science, INFORMS, vol. 46(9), pages 1214-1235, September.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1111.4808. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.