ACCURATE VALUATION OF FINANCIAL OPTIONS BY EFFICIENT SIMULATION OF PROBABILITY DISTRIBUTIONS
Abstract
In this paper we analyze possible implementations and applications of
Ornstein-Uhlenbeck (O-U) process and probability distributions for valuation of option
contracts. Based on specific features and types of options we specify the advantages and
disadvantages of O-U based simulation for using it as a universal method to asses
different financial options. Implementation of a simulation code that uses pseudo random
number generation is suggested and tested to confirm its accuracy and effectiveness in
providing results that comply with and are very close to theoretically computer values for
an Ornstein-Uhlenbeck process.
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