Efficient Monte Carlo Barrier Option Pricing When the Underlying Security Price Follows a Jump-Diffusion Process

We present efficient simulation procedures for pricing barrier options when the underlying security price follows a geometric Brownian motion with jumps. Metwally and Atiya [2002] developed a simulation approach for pricing knock-out options in the same setting, but no variance reduction was introdu...

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Bibliographic Details
Published in:	The Journal of derivatives 2010-04, Vol.17 (3), p.45-52
Main Authors:	Ross, Sheldon M, Ghamami, Samim
Format:	Article
Language:	eng
Subjects:	Diffusion processes Estimates Monte Carlo method Monte Carlo simulation Simulation Stock options Studies Variances
Online Access:	Get full text
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Summary:	We present efficient simulation procedures for pricing barrier options when the underlying security price follows a geometric Brownian motion with jumps. Metwally and Atiya [2002] developed a simulation approach for pricing knock-out options in the same setting, but no variance reduction was introduced. We improve upon Metwally and Atiya's method by innovative applications of well-known variance reduction techniques. We also show how to use simulation to price knock-in options. Numerical examples show that our proposed Monte Carlo procedures lead to substantial variance reduction as well as a reduction in computing time. [PUBLICATION ABSTRACT]
ISSN:	1074-1240 2168-8524