VALUATION OF FINANCIAL DERIVATIVES USING MONTE CARLO SIMULATION

This paper presents an overview of the use of simulation algorithms in the field of financial engineering. The main purpose of this paper is providing comprehensive introduction to the application of simulation in finance and derivative pricing for students and professionals. We review the literature in first section. We explain some major concepts of financial engineering and simulation, and then describe how simulation uses in derivative pricing, how we can increase simulation efficiency and ultimately we implement these techniques in our case study to represent how these works and how much these are efficient for pricing derivatives in practice.

Keywords:

Monte-Carlo simulation , Scenario generation , Variance-Reduction , Quasi-random sequences , random variables , European option