TY - JOUR
T1 - Enhancing the accuracy of pricing American and Bermudan options
AU - Duck, Peter W.
AU - Newton, David P.
AU - Widdicks, Martin
AU - Leung, Yan
PY - 2005/6/1
Y1 - 2005/6/1
N2 - The basic Monte Carlo procedure for option pricing is appealing and simple to implement, and thus a popular tool for practitioners. Unmodified, though, it suffers from two serious shortcomings: a difficulty in treating early exercise, and only modestly accurate convergence characteristics. The Monte Carlo-based method of handling early exercise features can be improved by generating monotonically varying data that are then amenable to extrapolation procedures, thereby enhancing the overall accuracy and reliability of the scheme. Results for options on one and two underlyings compare extremely favorably with exact results for early exercise options. In a final test of the technique, results are computed for an option on five underlyings.
AB - The basic Monte Carlo procedure for option pricing is appealing and simple to implement, and thus a popular tool for practitioners. Unmodified, though, it suffers from two serious shortcomings: a difficulty in treating early exercise, and only modestly accurate convergence characteristics. The Monte Carlo-based method of handling early exercise features can be improved by generating monotonically varying data that are then amenable to extrapolation procedures, thereby enhancing the overall accuracy and reliability of the scheme. Results for options on one and two underlyings compare extremely favorably with exact results for early exercise options. In a final test of the technique, results are computed for an option on five underlyings.
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U2 - 10.3905/jod.2005.517184
DO - 10.3905/jod.2005.517184
M3 - Article
AN - SCOPUS:33846529242
SN - 1074-1240
VL - 12
SP - 34
EP - 44
JO - Journal of Derivatives
JF - Journal of Derivatives
IS - 4
ER -