Monte Carlo option model

In mathematical finance, a Monte Carlo option model is used to calculate the value of an option using Monte Carlo methods.

Monte Carlo models are particularly useful in the valuation of options with complicated features that make them difficult to value through a straightforward Black-Scholes style computation. Asian options are an example, another would be European options with multiple underlying assets. Conversely if an analytical technique for valuing an option exists, Monte Carlo methods will usually be too slow to be competitive. They are, in a sense, a method of last resort. The term 'Monte Carlo method' was coined by Stanislaw Ulam in the 1940's. The first application to option pricing was by Phelim Boyle in 1977 (for European options). In 1996 M. Broadie and P. Glasserman showed how to price Asian options by Monte Carlo. In 2001 F. A. Longstaff and E. S. Schwartz developed a practical Monte Carlo method for pricing American-style options.