Java Quant

            Financial Quantitative Algorithms

Monte Carlo method for financial option pricing

In the field of financial mathematics, the problem of finding the arbitrage-free value of a particular derivative, requires the computation of a particular integral. In many cases these integrals can be valued analytically, and in still more cases they can be valued using numerical integration. However when the number of dimensions (or degrees of freedom) in the problem is large, numerical integration methods become intractable. In these cases it is common to resort to the more widely applicable Monte Carlo methods to solve the problem. For large dimension integrals as can very often occur in financial problems, Monte Carlo methods converge to the solution more quickly than numerical integration methods.

 


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