15. Applications to Finance

  1. Dirk P. Kroese1,
  2. Thomas Taimre1 and
  3. Zdravko I. Botev2

Published Online: 20 SEP 2011

DOI: 10.1002/9781118014967.ch15

Handbook of Monte Carlo Methods

Handbook of Monte Carlo Methods

How to Cite

Kroese, D. P., Taimre, T. and Botev, Z. I. (2011) Applications to Finance, in Handbook of Monte Carlo Methods, John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118014967.ch15

Author Information

  1. 1

    University of Queensland

  2. 2

    Université de Montréal

Publication History

  1. Published Online: 20 SEP 2011
  2. Published Print: 28 FEB 2011

ISBN Information

Print ISBN: 9780470177938

Online ISBN: 9781118014967

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Keywords:

  • conditional Monte Carlo method;
  • control variable method;
  • financial engineering;
  • importance sampling;
  • infinitesimal perturbation analysis;
  • option pricing;
  • score function method;
  • stochastic volatility

Summary

Monte Carlo methods are frequently encountered in financial engineering. This chapter highlights some of the main Monte Carlo techniques used in option pricing. The techniques are the control variable method for pricing Asian call options, the conditional Monte Carlo method for pricing European call options with stochastic volatility, or with a barrier, the importance sampling method for pricing barrier options, infinitesimal perturbation analysis for estimating the sensitivities of European call options, and the score function method, combined with importance sampling, for estimating the Greeks of barrier options.

Controlled Vocabulary Terms

Conditional Monte Carlo method; importance sampling; Monte Carlo methods; stochastic processes