Monte Carlo Valuation of American Options
L. C. G. Rogers
University of Cambridge - Centre for Mathematical Sciences
Mathematical Finance, Vol. 12, pp. 271-286, 2002
This paper introduces a dual way to price American options, based on simulating the paths of the option payoff, and of a judiciously chosen Lagrangian martingale. Taking the pathwise maximum of the payoff less the martingale provides an upper bound for the price of the option, and this bound is sharp for the optimal choice of Lagrangian martingale. As a first exploration of this method, four examples are investigated numerically; the accuracy achieved with even very simple choices of Lagrangian martingale is surprising. The method also leads naturally to candidate hedging policies for the option, and estimates of the risk involved in using them.
Number of Pages in PDF File: 16
Keywords: Monte Carlo, American Option, Duality, Lagrangian, Martingale, Snell EnvelopeAccepted Paper Series
Date posted: March 19, 2003
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.562 seconds