Recent advances in simulation for security pricing (1995)

ABSTRACT

Computational methods play an important role in modern finance. Through the theory of arbitrage-free pricing, the price of a derivative security can be expressed as the expected value of its payouts under a particular probability measure. The resulting integral becomes quite complicated if there are several state variables or if payouts are path-dependent. Simulation has proved to be a valuable tool for these calculations. This paper summarizes some of the recent applications and developments of the Monte Carlo method to security pricing problems.

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