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Foresight Bias and Suboptimality Correction in Monte—Carlo Pricing of Options with Early Exercise

  • Christian P. Fries
Part of the Mathematics in Industry book series (MATHINDUSTRY, volume 12)

We provide a definition and an analytic formula for the so called foresight bias that may appear in the Monte—Carlo pricing of Bermudan and compound options if the exercise criteria is calculated by the same Monte—Carlo simulation as the exercise values. The analytical correction for the foresight bias is then applied to the Monte—Carlo pricing of a Bermudan option (Bellman's principle), resulting in better prices, especially for very low number of paths.

Keywords

Conditional Expectation Risk Free Asset Early Exercise Optimal Exercise Price Measure 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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References

  1. 1.
    Fries, C.P.: Foresight Bias and Suboptimality Correction in Monte-Carlo Pricing of Options with Early Exercise: Classification, Calculation and Removal (2005). http://www.christian-fries.de/finmath/foresightbias
  2. 2.
    Fries, C.P.: Mathematical Finance. Theory, Modeling, Implementation. Lectures Notes. Frankfurt am Main (2006). http://www.christian-fries.de/finmath/book

Copyright information

© Springer-Verlag Berlin Heidelberg 2008

Authors and Affiliations

  • Christian P. Fries

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