The Full Monte - Euler vs. Milstein

Abstract

A common problem in computational finance is the pricing of option contracts on single or multiple underlying financial assets. Calculating expected values of payoff functions contingent upon state variables, whose dynamics can be modeled by stochastic differential equations. Hence, Monte Carlo methods are a powerful technique for solving these equations computationally. This article uses the working of Fabrice Douglas Rouah to discuss the derivation of both Euler and Milstein schemes.