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A general approach to option pricing by simulation.

In an earlier chapter we looked at estimation of an European call option price by simulation.

Estimation by simulation is in fact completely general, and can be used to approximate the price on any European derivative. It is not feasible to use simulation on American derivatives, because the optimal exercise policy needs to be known. If the form of this was known, there would be a closed form solution.

But for European derivatives simulation is feasible. For more ``exotic'' options simulation is often the only solution.

I will show how we can make a general framework for simulation of derivatives prices.



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next up previous contents index
Next: Simulating prices of underlying. Up: Financial Numerical Recipes. Previous: Lookback options.   Contents   Index
Bernt Arne Odegaard
1999-09-09