WIAS Preprint No. 850, (2003)

Monte Carlo methods for pricing and hedging American options



Authors

  • Milstein, Grigori N.
  • Reiss, Oliver
  • Schoenmakers, John G. M.

2010 Mathematics Subject Classification

  • 60H30 65C30 91B28

Keywords

  • Pricing and hedging of American options, Monte Carlo simulation, Determination of the exercise boundary

Abstract

We introduce a new Monte Carlo method for constructing the exercise boundary of an American option in a generalized Black-Scholes framework. Based on a known exercise boundary, it is shown how to price and hedge the American option by Monte Carlo simulation of suitable probabilistic representations in connection with the respective parabolic boundary value problem. The methods presented are supported by numerical simulation experiments.

Appeared in

  • International Journal of Theoretical and Applied Finance Vol. 7, No. 5, 591-614(2004) under the title ''A new Monte Carlo method for American options''

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