Adaptations of Monte Carlo Simulation Technique To American Option Pricing
Serena A. Agoro-Menyang
This working paper is a review of adaptations of the Monte Carlo simulation methodology to American options valuation. In examining this topic, we discuss why other numerical methods, such as multinomial lattice and finite-difference methodologies, are often inadequate for the valuation of complex American options. We then describe three classes of adaptations of the Monte Carlo simulation approach for American options pricing – the regression-based method, the stochastic mesh method, and state-space partitioning method – which are designed to address the deficiencies of other numerical methods in pricing American options. As part of our survey, we contrast these three approaches. Download this document – Adaptations of Monte Carlo Simulation Technique To American Option Pricing (PDF Format, 162 KB) |
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