10.1007/s40096-016-0179-8

Digital barrier options pricing: an improved Monte Carlo algorithm

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  • Kazem Nouri*1,
  • Behzad Abbasi1,
  • Farahnaz Omidi1,
  • Leila Torkzadeh1,
  1. Department of Mathematics, Faculty of Mathematics, Statistics and Computer Sciences, Semnan University, Semnan, IR
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Published in Issue 2016-04-28

How to Cite

Nouri, K., Abbasi, B., Omidi, F., & Torkzadeh, L. (2016). Digital barrier options pricing: an improved Monte Carlo algorithm. Mathematical Sciences, 10(3 (September 2016). https://doi.org/10.1007/s40096-016-0179-8
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Abstract

Abstract A new Monte Carlo method is presented to compute the prices of digital barrier options on stocks. The main idea of the new approach is to use an exceedance probability and uniformly distributed random numbers in order to efficiently estimate the first hitting time of barriers. It is numerically shown that the answer of this method is closer to the exact value and the first hitting time error of the modified Monte Carlo method decreases much faster than of the standard Monte Carlo methods.

Keywords

  • Digital option,
  • Double barrier,
  • Monte Carlo simulation,
  • Uniform distribution
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