zbMATH — the first resource for mathematics

Estimating security price derivatives using simulation. (English) Zbl 0881.90018
Summary: Simulation has proved to be a valuable tool for estimating security prices for which simple closed form solutions do not exist. In this paper, we present two direct methods, a pathwise method and a likelihood ratio method, for estimating derivatives of security prices using simulation. With the direct methods, the information from a single simulation can be used to estimate multiple derivatives along with a security’s price. The main advantage of the direct methods over resimulation is increased computational speed. Another advantage is that the direct methods give unbiased estimates of derivatives, whereas the estimates obtained by resimulation are biased. Computational results are given for both direct methods, and comparisons are made to the standard method of resimulation to estimate derivatives. The methods are illustrated for a path independent model (European options), a path dependent model (Asian options), and a model with multiple state variables (options with stochastic volatility).

91B24 Microeconomic theory (price theory and economic markets)
91B28 Finance etc. (MSC2000)
Full Text: DOI