Monte Carlo & Quasi-Monte Carlo approach in option pricing

Abstract

Monte Carlo simulation has been proven to be a valuable tool for estimating security prices. This study is about comparing Monte Carlo and Quasi-Monte Carlo approach in pricing European call option. Both approaches has an attractive properties of numerical valuation of derivatives, with Quasi-Monte Carlo simulation using low discrepancy sequences for valuing derivatives versus the traditional Monte Carlo method using pseudo-random sequences. The performance of these methods is evaluated based on pricing European call options and by John Birge's paper in 1995. Option price using Black Scholes method generated by MATLAB will be the benchmark to testify results from both Monte Carlo and Quasi-Monte Carlo approach. At the end of the study, it is proven that Quasi-Monte Carlo approach does give better result than Monte Carlo approach in pricing a call option. It is discovered that Quasi-Monte Carlo using hybrid Halton sequence gave better results compared to Quasi-Monte Carlo because of the random sequence it generated.