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Pricing exotic options using strong convergence properties?

Abstract:

In finance, the strong convergence properties of discretisations of stochastic differential equations (SDEs) are very important for the hedging and valuation of exotic options. In this paper we show how the use of the Milstein scheme can improve the convergence of the multi-level Monte Carlo method, so that the computational cost to achieve an accuracy of O(e) is reduced to O($\epsilon^{−2}$) for a Lipschitz payoff. The Milstein scheme gives first order strong convergence for all 1−dimensiona...

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Klaus Schmitz Abe More by this author
M. B. Giles More by this author
Publication date:
2006
URN:
uuid:78a35416-5c40-4ea8-b1e3-29b63beeeb41
Local pid:
oai:eprints.maths.ox.ac.uk:581

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