HEURISTIC METHODS FOR SIMULATION OF ASSET PATHS IN THE BLACK-SCHOLES MODEL
Abstract
In this paper we explore a straightforward procedure for pricing financial
derivatives by means of the famous Monte Carlo method when the underlying asset
follows a jump-diffusion process. The Black-Scholes model is compared with one of its
extensions, the Merton model, that is better in capturing the market and is comparative to
stochastic volatility models in terms of pricing accuracy. By simulations of asset paths with
the Monte Carlo method we price efficiently and accurately the premium of options with
barriers.
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