Communications in Mathematical Finance

Some Numerical Methods for Options Valuation

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• Abstract

  Numerical Methods form an important part of options valuation and especially in cases where there is no closed form analytic formula. We discuss three numerical methods for options valuation namely Binomial model, Finite difference methods and Monte Carlo simulation method. Then we compare the convergence of these methods to the analytic Black-Scholes price of the options. Among the methods considered, Crank Nicolson finite difference method is unconditionally stable, more accurate and converges faster than binomial model and Monte Carlo Method when pricing vanilla options, while Monte carlo simulation method is good for pricing path dependent options.