Author(s)

Armin Müller

FernUniversität in Hagen, Lehrstuhl für angewandte Statistik und Methoden der empirischen Sozialforschung, Hagen, Germany.

Pricing derivatives with Monte-Carlo simulations involve standard errors that typically decrease at a rate proportional to where N is the sample size. Several approaches have been discussed to reduce the empirical variance for a given sample size. This article analyzes the joint application of the put-call-parity approach and importance sampling to variance reduced option pricing. For this purpose, we examine non-path-dependent and path-dependent options. For European options, we observe dramatic variance reduction, especially for in-the-money options. Also for arithmetic Asian options, a significant variance reduction is achieved.

Monte-Carlo Simulation, Variance Reduction, Importance Sampling, Put-Call-Parity, Asian Option

Müller, A. (2016) Improved Variance Reduced Monte-Carlo Simulation of in-the-Money Options. Journal of Mathematical Finance, 6, 361-367. doi: 10.4236/jmf.2016.63029.