Random Lattices for Option Pricing Problems in Finance

Abstract

While the use of Monte Carlo methods is well established for pricing derivatives, this paper focuses on a random-lattice approach, also known in the literature as the stochastic-mesh method. The method is reviewed here. We show that the method may be refined with an ad-hoc bias correction, that suitably adjusts these models for accuracy. The paper presents experimental results, related analysis, and a set of applications, demonstrating easy applicability to popular choices for option pricing stochastic processes. The flexibility and ease of implementation of this approach, as seen from the examples, suggests that this approach has wide practical applicability.