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
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
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