Monte Carlo methods for pricing and hedging American options

G. N. Milstein, Oliver Reiß, John Schoenmakers ; Weierstraß-Institut für Angewandte Analysis und Stochastik

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.

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Year of publication:	2003
Authors:	Milʹstejn, Grigorij N. ; Reiß, Oliver ; Schoenmakers, John
Institutions:	Weierstraß-Institut für Angewandte Analysis und Stochastik (issuing body)
Publisher:	Berlin : Weierstraß-Inst. für Angewandte Analysis und Stochastik
Subject:	Optionspreistheorie \| Option pricing theory \| Hedging \| Monte-Carlo-Simulation \| Monte Carlo simulation \| Theorie \| Theory