Monte Carlo Simulation of an American Option
We implement gradient estimation techniques for sensitivity analysis of option pricing which can be efficiently employed in Monte Carlo simulation. Using these techniques we can simultaneously obtain an estimate of the option value together with the estimates of sensitivities of the option value to...
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| Format: | Article |
| Language: | English |
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International Institute of Informatics and Cybernetics
2007-04-01
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| Series: | Journal of Systemics, Cybernetics and Informatics |
| Subjects: | |
| Online Access: | http://www.iiisci.org/Journal/CV$/sci/pdfs/P405572.pdf
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| _version_ | 1811262214193020928 |
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| author | Gikiri Thuo |
| author_facet | Gikiri Thuo |
| author_sort | Gikiri Thuo |
| collection | DOAJ |
| description | We implement gradient estimation techniques for sensitivity analysis of option pricing which can be efficiently employed in Monte Carlo simulation. Using these techniques we can simultaneously obtain an estimate of the option value together with the estimates of sensitivities of the option value to various parameters of the model. After deriving the gradient estimates we incorporate them in an iterative stochastic approximation algorithm for pricing an option with early exercise features. We illustrate the procedure using an example of an American call option with a single dividend that is analytically tractable. In particular we incorporate estimates for the gradient with respect to the early exercise threshold level. |
| first_indexed | 2024-04-12T19:21:13Z |
| format | Article |
| id | doaj.art-14523ad71d9144128d680f7c434bc163 |
| institution | Directory Open Access Journal |
| issn | 1690-4524 |
| language | English |
| last_indexed | 2024-04-12T19:21:13Z |
| publishDate | 2007-04-01 |
| publisher | International Institute of Informatics and Cybernetics |
| record_format | Article |
| series | Journal of Systemics, Cybernetics and Informatics |
| spelling | doaj.art-14523ad71d9144128d680f7c434bc1632022-12-22T03:19:35ZengInternational Institute of Informatics and CyberneticsJournal of Systemics, Cybernetics and Informatics1690-45242007-04-01525761Monte Carlo Simulation of an American OptionGikiri Thuo0 Florida A&M University We implement gradient estimation techniques for sensitivity analysis of option pricing which can be efficiently employed in Monte Carlo simulation. Using these techniques we can simultaneously obtain an estimate of the option value together with the estimates of sensitivities of the option value to various parameters of the model. After deriving the gradient estimates we incorporate them in an iterative stochastic approximation algorithm for pricing an option with early exercise features. We illustrate the procedure using an example of an American call option with a single dividend that is analytically tractable. In particular we incorporate estimates for the gradient with respect to the early exercise threshold level.http://www.iiisci.org/Journal/CV$/sci/pdfs/P405572.pdf Perturbation AnalysisBlack-Scholes modelOption PricingSimulationgradient |
| spellingShingle | Gikiri Thuo Monte Carlo Simulation of an American Option Journal of Systemics, Cybernetics and Informatics Perturbation Analysis Black-Scholes model Option Pricing Simulation gradient |
| title | Monte Carlo Simulation of an American Option |
| title_full | Monte Carlo Simulation of an American Option |
| title_fullStr | Monte Carlo Simulation of an American Option |
| title_full_unstemmed | Monte Carlo Simulation of an American Option |
| title_short | Monte Carlo Simulation of an American Option |
| title_sort | monte carlo simulation of an american option |
| topic | Perturbation Analysis Black-Scholes model Option Pricing Simulation gradient |
| url | http://www.iiisci.org/Journal/CV$/sci/pdfs/P405572.pdf
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| work_keys_str_mv | AT gikirithuo montecarlosimulationofanamericanoption |