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Pricing of financial derivatives via simulation

Author:

Michael C. FuAuthors Info & Claims

WSC '95: Proceedings of the 27th conference on Winter simulation

Pages 126 - 132

https://doi.org/10.1145/224401.224453

Published: 01 December 1995 Publication History

Abstract

The word "derivative" has led a ubiquitous existence in the news in recent years. This paper gives a tutorial on financial derivatives and the use of Monte Carlo simulation techniques for their pricing. We provide the basic financial terminology and key concepts in the field, focusing on options pricing, in particular. Although no prior knowledge of finance is assumed in the exposition, previous experience with stochastic simulations-generation of random inputs and basic statistical output analysis-is requisite.

References

[1]

Boyle, P.P. 1977. Options: a Monte Carlo approach. Journal of Financial Economics 4: 323-338.

[2]

Broadie, M. and Glasserman, P. 1993. Estimating security price derivatives using simulation, submitted for publication.

[3]

Broadie, M. and Glasserman, P. 1995. Pricing American-style options. Working paper. Columbia University.

[4]

Cox, John C. and Rubinstein, Mark. 1985. Optzons markets. Englewood Cliffs, N.J.: Prentice-Hall.

[5]

Cox, J.C. and Ross, S.A. 1976. The valuation of options for alternative stochastic processes," Journal of Financial Economics 3: 145-166.

[6]

Fu, M.C. 1994a. Optimization using simulation: a review. Annals of Operations Research 53: 199- 248.

[7]

Fu, M.C. 1994b. A tutorial review of techniques for simulation optimization. In Proceedzngs of the 199~ Wznter Simulation Conference, 149-156.

Digital Library

[8]

Fu, M.C. and J.Q. Hu. 1995. Sensitivity analysis for Monte Carlo simulation of option pricing, Probability in the Engineemng and Informational Sciences, Vol.9, No.3.

[9]

Fu, M.C, Madan, D.B., and T.Wang. 1995. Pricing continuous time Asian options: a comparison of analytical and Monte Carlo methods, presented at the 12th International Conference in Finance, June 1995, Bordeaux, France. also, submitted for publication.

[10]

Geman, H. and Kydeland, A. 1995. Domino effect. Risk Volume 8, No. 4.

[11]

Geman, H. and Yor, M. 1993. Bessel processes, Asian options and perpetuities. Mathematical F~nance 3, No.4: 349-375.

[12]

Gibson, Rajna. 1991. Option valuation: analyzzng and pricing standardized options contracts. New York: McGraw-Hill.

[13]

Glasserman, P. 1991. Gradient Estimation Via Perturbation Analysis. Kluwer Academic.

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Harrison, J.M. and Pliska, S. 1981. Martingales and stochastic integrals in the theory of continuous trading. Stochastic Processes and their Applicat,erie 11: 215-260.

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Ho, Y.C. and X.R. Cao. 1991. Perturbation Analysis and Discrete Event Dynamic Systems. Kluwer Academic.

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Hull, J.C. 1993. Options, Futures, and Other Derivative Securities, 2nd edition. Prentice Hall.

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Hull, J.C. and White, A. 1987. The pricing of options on assets with stochastic volatilities, Journal of Finance 42: 281-300.

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Johnson, H. and Shanno, D. 1987. Option pricing when the variance is changing. Journal of Financial and Quantitative Analysis 22: 143-151.

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Stoll, Hans R., and Whaley, Robert E. 1993. Futures and options : theory and applications. Cincinnati, Ohio: South-Western Pub. Co.

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Tilley, J. 1993. Valuing American options in a path simulation model. Transactzons of the Society of Actuaries 45: 83-104.

Cited By

(2015)ReferencesFinancial Modeling with Crystal Ball and Excel10.1002/9781119203216.refs(301-309)Online publication date: 18-Sep-2015
https://doi.org/10.1002/9781119203216.refs
Thulasiram RThulasiraman P(2010)Pricing algorithms for financial derivativesAlgorithms and theory of computation handbook10.5555/1882723.1882756(33-33)Online publication date: 1-Jan-2010
https://dl.acm.org/doi/10.5555/1882723.1882756
Cobb BCharnes JTew J(2007)Real options valuationProceedings of the 39th conference on Winter simulation: 40 years! The best is yet to come10.5555/1351542.1351578(173-182)Online publication date: 9-Dec-2007
https://dl.acm.org/doi/10.5555/1351542.1351578
Show More Cited By

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Pricing of financial derivatives via simulation

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Published In

cover image ACM Conferences

WSC '95: Proceedings of the 27th conference on Winter simulation

December 1995

1493 pages

ISBN:0780330188

Chairmen:
William R. Lilegdon
Pritsker Corp., West Lafayette, IN
,
David Goldsman
Georgia Institute of Technology, Atlanta
,
Editors:
Christos Alexopoulos
Georgia Institute of Technology, Atlanta
,
Keebom Kang
Naval Postgraduate School, Monterey, CA

Sponsors

IIE: Institute of Industrial Engineers
IEEE-SMCS: Systems, Man & Cybernetics Society
INFORMS/CS: Computer Science TC
ASA: American Statistical Association
ACM: Association for Computing Machinery
SCS: Society for Computer Simulation
SIGSIM: ACM Special Interest Group on Simulation and Modeling
IEEE-CS: Computer Society
NIST: National Institute of Standards & Technology

Publisher

IEEE Computer Society

United States

Publication History

Published: 01 December 1995

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IIE
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INFORMS/CS
ASA
ACM
SCS
SIGSIM
IEEE-CS
NIST

WSC95: 1995 Winter Simulation Conference

December 3 - 6, 1995

Virginia, Arlington, USA

Acceptance Rates

WSC '95 Paper Acceptance Rate 122 of 183 submissions, 67%;

Overall Acceptance Rate 3,413 of 5,075 submissions, 67%

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Cited By

(2015)ReferencesFinancial Modeling with Crystal Ball and Excel10.1002/9781119203216.refs(301-309)Online publication date: 18-Sep-2015
https://doi.org/10.1002/9781119203216.refs
Thulasiram RThulasiraman P(2010)Pricing algorithms for financial derivativesAlgorithms and theory of computation handbook10.5555/1882723.1882756(33-33)Online publication date: 1-Jan-2010
https://dl.acm.org/doi/10.5555/1882723.1882756
Cobb BCharnes JTew J(2007)Real options valuationProceedings of the 39th conference on Winter simulation: 40 years! The best is yet to come10.5555/1351542.1351578(173-182)Online publication date: 9-Dec-2007
https://dl.acm.org/doi/10.5555/1351542.1351578
Cobb BCharnes J(2004)Approximating free exercise boundaries for American-style options using simulation and optimizationProceedings of the 36th conference on Winter simulation10.5555/1161734.1162038(1637-1644)Online publication date: 5-Dec-2004
https://dl.acm.org/doi/10.5555/1161734.1162038
Charnes JFishwick PKang KJoines JBarton R(2000)Options pricingProceedings of the 32nd conference on Winter simulation10.5555/510378.510404(151-157)Online publication date: 10-Dec-2000
https://dl.acm.org/doi/10.5555/510378.510404

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