![]() In these cases, simulation methods often give better results, because they have proved to be valuable and flexible computational tools to calculate the value of options with multiple sources of uncertainty or with complicated features. However, when the number of dimensions in the problem is large, analytical models and numerical integrals become unavailable, the formulas exhibiting them are complicated, entail many restrictive assumptions and difficult to evaluate accurately by conventional methods. ![]() R aimonda Mar tinkutė-Kaulienė, Jelena Stankevičienė, Santautė Žinytė Option pricing using Monte Carlo simulation For example, the Black-Scholes model provides explicit closed form solutions for the values of certain (European style) call and put options. So in many cases those integrals can be valued analytically, and in still more cases they can be valued using numerical integration. The primary methods for pricing options are binomial trees and other lattice methods, such as trinomial trees, and finite difference methods to solve the associated boundary value partial differential equations. Many problems in mathematical finance involve the computation of a particular integral. The pricing of option contracts is a very important area of research. Options can be used to speculate for profit, ISSN 2029-7017 print/ISSN 2029-7025 onlineĮarn income to enhance investment returns, protect against a temporary decline in the value of a stock or other commodity both financial and material. 2013) illustrated that options incorporate an insurance element not available in any other security and because of that they can be used by investors to create return distributions unobtainable with the strategy of allocating funds between a stock portfolios and fixed income securities. Empirical researches presented in financial literature (Hull 2008, Friedentag 2000, Martin 2001, Evrim-Mandaci et al. Options can be used in many imaginative ways to create various attractive investment opportunities. This growing was determined by the special features that options include. Since then, the volumes of their trade had risen sharply all over the world. Introduction Though the history of trading in option contracts is quite old for the first time exchange listed options were traded in 1973. Option pricing using Monte Carlo simulation, Journal of Security and Sustainability Issues 2(4): 65–79. Reference to this paper should be made as follows: Martinkutė- Kaulienė, R. Keywords: option contract, price, stock price, call, put, Monte Carlo simulation, Black-Scholes model. The purpose of the research is to adopt Monte Carlo simulation method to predict prices of plain vanilla options and to compare them to real option prices and option prices calculated using analytical Black-Scholes formula. As the exact valuation of options is quite difficult, the article deals with the theoretical and practical aspects of pricing of options. But investor must understand that one of the main aspects of profitable trading in derivative securities is their proper evaluation and pricing. Empirical researches all over the world illustrated that options incorporate an insurance element not available in any other security and because of that they can be used by investors to create return distributions unobtainable with the strategy of allocating funds between fixed income securities and stock portfolios. Special features that options include are the main reason of their growing amounts trading in the financial markets. Received 11 September 2012 accepted 16 March 2013 Abstract. 11, LT-10223 Vilnius, Lithuania E-mails: (corresponding author) 3 1,2,3 OPTION PRICING USING MONTE CARLO SIMULATION Raimonda Martinkutė-Kaulienė1, Jelena Stankevičienė2, Santautė Žinytė3 Vilnius Gediminas Technical University, Saulėtekio al. NATO Energy Security Centre of Excellence Ministry of National Defence Republic of Lithuania University of Salford A Greater Manchester University The General Jonas Žemaitis Military Academy of Lithuania
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