On the Accuracy of Binomial Model and Monte Carlo Method for Pricing European Options


We consider the accuracy of two numerical methods for determining the price of an options namely Binomial model and Monte Carlo method. Then we compare the convergence and accuracy of the methods to the analytic Black-Scholes price of European option. Binomial model is very simple but powerful technique that can be used to solve many complex options pricing problem. Monte Carlo method is very flexible in handling high dimensional financial problems. Moreover Binomial model is more accurate and converges faster than Monte Carlo method when pricing European options.

Keywords: Accuracy, Binomial Model, European option, Monte Carlo Method

Unique Article ID: IJMSS-117
Article Review Status: Published

Pages: 38-54 (Download PDF)

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This work by European American Journals is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License

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