The aim of this paper is to present simulation methods for the pricing of American financial instruments. Three methods are presented. Each differs from the others in it's approach to the problem and the method of finding a solution. We illustrate the variety of possible approaches that can be adopted when dealing with this complicated problem. The results of using these algorithms are compared with examples found in literature on the subject. We try to identify the factors that influence price estimators and provide some new results about the properties and distributions of those estimators. We show that even a simple variance reduction technique has a positive effect for these algorithms. The purpose of this paper is to present the effectiveness of a simulation method in pricing American options. This is contrary to the opinion often stated in articles and monographs that the simulation approach is not adequate for the task. We provide an overview and comparison of earlier methods proposed and follow this with an extended discussion. This paper sets the foundations for further research into use of these algorithms for multidimensional problems, where they may offer a substantial advantage over deterministic methods.
| Identifer | oai:union.ndltd.org:UPSALLA1/oai:DiVA.org:hh-13988 |
| Date | January 2010 |
| Creators | Kudla, Jakub |
| Publisher | Högskolan i Halmstad, Sektionen för Informationsvetenskap, Data– och Elektroteknik (IDE), Högskolan i Halmstad, Tillämpad matematik och fysik (MPE-lab) |
| Source Sets | DiVA Archive at Upsalla University |
| Language | English |
| Detected Language | English |
| Type | Student thesis, info:eu-repo/semantics/bachelorThesis, text |
| Format | application/pdf |
| Rights | info:eu-repo/semantics/openAccess |
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