Digital Repository at the University of Maryland (DRUM)  >
Robert H. Smith School of Business  >
Decision, Operations & Information Technologies  >
Decision, Operations & Information Technologies Research Works 

Please use this identifier to cite or link to this item: http://hdl.handle.net/1903/2299

Title: Sensitivity Analysis for Monte Carlo Simulation of Option Pricing
Authors: Fu, Michael C.
Hu, Jian-Qiang
Type: Article
Keywords: options pricing
simulation
perturbation analysis
SPA
American-style derivatives
Monte Carlo
sensitivity analysis
stochastic approximation algorithm
gradient estimation
Issue Date: 1995
Citation: Probability in the Engineering and Informational Sciences, Vol. 9, No. 3, 417-446
Abstract: Monte Carlo simulation is one alternative for analyzing options markets when the assumptions of simpler analytical models are violated. We introduce techniques for the sensitivity analysis of option pricing which can be efficiently carried out in the simulation. In particular, using these techniques, a single run of the simulation would often provide not only an estimate of the option value but also estimates of the sensitivities of the option value to various parameters of the model. Both European and American options are considered, starting with simple analytically tractable models to present the idea and proceeding to more complicated examples. We then propose an approach for the pricing of options with early exercise features by incorporating the gradient estimates in an iterative stochastic approximation algorithm. The procedure is illustrated in a simple example estimating the option value of an American call. Numerical results indicate that the additional computational effort required over that required to estimate a European option is relatively small.
Description: corrections to published article; additional tables for numerical results
URI: http://hdl.handle.net/1903/2299
Appears in Collections:Decision, Operations & Information Technologies Research Works

Files in This Item:

File Description SizeFormatNo. of Downloads
opPEIS-corrected.pdf603.61 kBAdobe PDF2496View/Open

All items in DRUM are protected by copyright, with all rights reserved.

 

DRUM is brought to you by the University of Maryland Libraries
University of Maryland, College Park, MD 20742-7011 (301)314-1328.
Please send us your comments