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2004•Mathematical FinanceOpen access

MONTE CARLO METHODS FOR THE VALUATION OF MULTIPLE‐EXERCISE OPTIONS

Nicolai Meinshausen, Ben M. Hambly

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Abstract

We discuss Monte Carlo methods for valuing options with multiple‐exercise features in discrete time. By extending the recently developed duality ideas for American option pricing, we show how to obtain estimates on the prices of such options using Monte Carlo techniques. We prove convergence of our approach and estimate the error. The methods are applied to options in the energy and interest rate derivative markets.

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We discuss Monte Carlo methods for valuing options with multiple‐exercise features in discrete time. By extending the recently developed duality ideas for American option pricing, we show how to obtain estimates on the prices of such options using Monte Carlo techniques. We prove convergence of our approach and estimate the error. The methods are applied to options in the energy and interest rate derivative markets.

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Available abstract

We discuss Monte Carlo methods for valuing options with multiple‐exercise features in discrete time. By extending the recently developed duality ideas for American option pricing, we show how to obtain estimates on the prices of such options using Monte Carlo techniques. We prove convergence of our approach and estimate the error. The methods are applied to options in the energy and interest rate derivative markets.

Key concepts: Monte Carlo method, Monte Carlo methods for option pricing, Valuation of options, Valuation (finance), Binomial options pricing model, Derivative (finance), Econometrics, Quasi-Monte Carlo method

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