Pricing and Hedging American-Style Options: A Simple Simulation-Based Approach

摘要: This article presents a simple yet powerful simulation-based approach for approximating the values of prices and Greeks (i.e. derivatives with respect to underlying spot prices, such as delta, gamma, etc) American-style options. is primarily based upon Least Squares Monte Carlo (LSM) algorithm thus termed Modified LSM (MLSM) algorithm. The key this that initial asset randomly generated from carefully chosen distribution, we obtain regression equation value function, which can be differentiated analytically generate estimates Greeks. Our intuitive, easy apply, computationally efficient most importantly, provides unified framework estimating risk sensitivities option price prices. We demonstrate effectiveness technique series increasingly complex but realistic examples.