Pricing Path Dependent Contracts in the Presence of Stochastic Volatility - Combining Numerical Integration, Finite Difference and Conditional Monte Carlo

18 Pages Posted: 16 Oct 2014

Date Written: October 16, 2014

Abstract

In this article the pricing of path dependent contracts combining conditional Monte Carlo, finite difference and numerical integration is considered. It will be shown that for two standard barrier contracts - one touch and knockout barrier options - very few Monte Carlo volatility paths, when combined with the other numerical methods, are required in order to accurately price these contracts in the presence of correlated stochastic volatility.

Keywords: Conditional Monte Carlo, stochastic volatility, SABR model, correlation swaps

JEL Classification: G12

Suggested Citation

McGhee, William A, Pricing Path Dependent Contracts in the Presence of Stochastic Volatility - Combining Numerical Integration, Finite Difference and Conditional Monte Carlo (October 16, 2014). Available at SSRN: https://ssrn.com/abstract=2510746 or http://dx.doi.org/10.2139/ssrn.2510746

William A McGhee (Contact Author)

NatWest Markets ( email )

250 Bishopsgate
London, EC2M 4AA
United Kingdom

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