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Hmmm, practically speaking pricing European Options using simulations is not recommended when you can use a beautiful close formed solution (along the lines of
by phyalow 13y ago
Hmmm, practically speaking pricing European Options using simulations is not recommended when you can use a beautiful close formed solution (along the lines of a modified Garman–Kohlhagen model)! But for other styles american, quantos, barriers etc this lattice simulation is great. Curious as to why the author only focused on Europeans!
- shoo 13y agoi would also find it very interesting to see distinct mathematical approaches for solving these kinds of problems compared. are finite-element models or some other approximation of the probability distribution used in practice as an alternative to simulation when closed-form solutions are not available?
- phyalow 13y agoHi, apologies for the slow reply. Yes predominately Monte-carlo simulations are used. If you are interested in the field an easy entry point is Paul Wilmotts "Introduction to Quantitative Finance".