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Option Pricing and Sensitivity Evaluation Methodology: Improvement of Speed and Accuracy
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 Title & Authors
Option Pricing and Sensitivity Evaluation Methodology: Improvement of Speed and Accuracy
Choi, Young-Soo; Oh, Se-Jin; Lee, Won-Chang;
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 Abstract
This paper presents how to improve the efficiency and accuracy in the pricing and sensitivity evaluation for derivatives, since the need for the evaluation of complicated derivatives is increased. The Monte Carlo(MC) simulation using the quasi random number instead of pseudo random number can improve the elapsed time and accuracy for the valuation of European-type derivatives. However, the quasi MC simulation method has its limit for applying it in the multi-dimensional case such as American-type and path-dependent options due to the increased correlation between dimensions as the dimension of random numbers is increased. In order to complement this problem, we develop a modified method in which correlation values are controlled to be below a pre-specified value. Thus, this method is applicable for the pricing of either derivatives ill which underlying assets or risk factors are several or derivatives having path-dependent or early redemption property. Furthermore, we illustrate that it is important to take an appropriate grid interval for the use of finite difference method(FDM) by applying the FDM to one example of non-symmetrical butterfly spreads.
 Keywords
Option pricing;finite difference method;Monte Carlo simulation;Quasi random number;American put option;
 Language
Korean
 Cited by
 References
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