Monte Carlo Method for Financial Option Pricing

Abstract

Monte Carlo methods allow for the introduction of a statistical approach to risk in financial decision. These methods utilize probabilistic simulations and pseudo random numbers, the precision of these methods is assessed by the size of confidence interval of the estimator’s variance. We explore variance reduction methods such as the control variables method and the antithetic variables method, highlighting their significance in enhancing the accuracy of Monte Carlo methods through simulation in financial option pricing through specific examples, with a focus on the European option and the Asian option.