Abstract

CASTRO, Javier Gutiérrez; BAIDYA, Tara K. Nanda  and  AIUBE, Fernando A. Lucena. Utilization of Monte Carlo Simulation and Threshold Curve to Value American Put Options. Inv. Op. [online]. 2007, vol.27, n.1, pp.67-83. ISSN 0874-5161.

In 1973 Black and Scholes [2] published their article on the valuation of European option. Since then, there have been many works extending this work in many directions. One such direction is the valuation of American options. On the matter, no exact analytical formula has been developed yet. In stead, numerical methods have been used in their valuations. Monte Carlo simulation has been the method which has become more and more popular among researchers in this field. The threshold curve method, used by Grant, Vora and Weeks [7] to value American options, is calculated through Monte Carlo simulation. This is the traditional method used in finance. We propose to modify the methodology of Ibáñez and Zapatero [9], which also uses the threshold curve, to obtain a more efficient and more accurate method than that of Grant, Vora and Weeks [7]. In this work, the described procedures and numerical tests are focused in American Put Options.

Keywords : American Put Options; Monte Carlo Simulation; Threshold Curve.

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