A Monte Carlo approach to value exchange options using a single stochastic factor推荐.pdfVIP

A Monte Carlo approach to value exchange options using a single stochastic factor Giovanni Villani Abstract. This article describes an important sampling regarding modification of the Monte Carlo method in order to minimise the variance of simulations. In a particular way, we propose a generalisation of the antithetic method and a new a -sampling of stratified procedure with 1 a = 2 to value exchange options using a single stochastic factor. As is well known, exchange options give the holder the right to exchange one risky asset V for another risky asset D and therefore, when an exchange option is valued, we generally are exposed to two sources of uncertainity. The reduction of the bi-dimensionality of valuation problem to a single stochastic factor implies a new stratification procedure to improve the Monte Carlo method. We also provide a set of numerical experiments to verify the accuracy derived by a -sampling. Key words: exchange options, Monte Carlo simulations, variance reduction 1 Introduction Simulations are widely used to solve option pricing. With the arrival of ever faster computers coupled with the development of new numerical methods, we are able to numerically solve an increasing number of important security pricing models. Even where we appear to have analytical solutionsit is often desirable to have an alternative implementation that is supposed to give the same answer. Simulation methods for asset pricing were introduced in finance by Boyle [3]. Since that time simulation has been successfully applied to a wide range of pricing problems, particularly to value American options, as witnessed by the contributions of Tilley [10], Barraquand and Martineau [2], Broadie and Glasserman [4], Raymar and Zwecher [9]. The aim of this paper is to improve the Monte Carlo procedure in order to evaluate exchange options generalizing the antithetic variate methodology and proposing a new s