PRICING AMERICAN-STYLE OPTIONS BY SIMULATION

This paper presents an overview of the recent advances in the pricing of American-style securities by simulation. In addition to general considerations related to the use of Monte Carlo simulation in the context of derivatives pricing, five approaches that address the valuation of early-exercisable options are presented: the regression approach, the parametric approach, the stratification approach, simulated trees, and stochastic meshes. The paper provides a brief discussion of each approach with references to the most significant contributions in the academic literature.