Applications
A comparison of Monte Carlo and Quasi-Monte Carlo
methods for option pricing
In this study we consider European call options. Asian Option pricing is considered here. European call option provides the holder of the option with the right to buy the underlying asset by a certain date for a given price known as the strike price. The date in the contract is known as the maturity. The payoff function is the following:
In a risk-neutral environment, the value of a derivative is the discounted value of its expected terminal date cash flow:
Monte Carlo simulation approximates the expectation of the derivative's terminal cash flows with an arithmetic average of the cash flows taken over a finite number of simulated price paths:
Numerical results and discussion
Asset, t=0 | 100 |
Volatility | 20.00% |
Int. rate | 5.00% |
Strike | 100 |
Expiry | 0.5 [years] |
Black-Scholes Value: 6.88 |
Call(Expiry) =
exp(-5% * 0.5) * max(AssetPrice – 100,0)
Simulation Parameters:
Time-Step size: 0.01 years
Number of time steps: 50
Number of paths: 6,000
Fig. 1: Price of European Call versus the number of paths obtained using MC and QMC methods with Standard and Brownian Bridge approximations.
Fig. 2: Relative error versus the number of paths for MC and QMC methods with Standard and Brownian Bridge approximations.
Fig. 3: Log-log plot of the absolute value of the relative error versus the number of paths for QMC methods with Standard and Brownian Bridge approximations.
Results show superior performance of the QMC approach based on SobolSeq with the Brownian Bridge approximation. The convergence rate for the Brownian Bridge approximation decreases as 1/N0.82, while for the Standard approximation this rate is only 1/N0.4.
Broda's generator was used for simulation. The details of other option and risk measures (Gammas) computation are presented here and here.