This calculator uses the Monte Carlo simulation to estimate the fair value of a European call or put option. Enter the parameters and press "Calculate."
Results
| Metric | Call Option | Put Option |
|---|---|---|
| Option Price |
Monte Carlo Option Pricing Model Explanation
The Monte Carlo Option Pricing Model is a numerical method used to estimate the price of complex financial instruments, especially options with multiple sources of uncertainty or exotic features. The model simulates the random paths the underlying asset’s price may take and calculates the average option payoff across these paths, discounted back to the present value.
Key Parameters
- Stock Price (S): The current price of the underlying asset.
- Strike Price (K): The price at which the option can be exercised.
- Risk-free Interest Rate (r): The risk-free rate used to discount future payoffs.
- Volatility (σ): The expected volatility of the stock price.
- Time to Expiration (T): The time remaining until the option expires.
- Number of Simulations (N): The number of simulated price paths for the underlying asset.
Monte Carlo Simulation Formulae
The random stock price path at each time step is modeled as:
where \( Z \) is a standard normal random variable.
The expected option payoff across all simulations is:
Steps in the Monte Carlo Simulation
- Simulate multiple random price paths for the underlying asset.
- Calculate the payoff for the option at the end of each simulation.
- Discount the average payoff back to the present value.
Advantages of the Monte Carlo Model
- Can handle complex, path-dependent options that are difficult to price analytically.
- Flexible and applicable to various types of options and financial derivatives.
- Provides a deeper understanding of potential future asset price paths and their impacts on option prices.
Further Reading
Suf is a senior advisor in data science with deep expertise in Natural Language Processing, Complex Networks, and Anomaly Detection. Formerly a postdoctoral research fellow, he applied advanced physics techniques to tackle real-world, data-heavy industry challenges. Before that, he was a particle physicist at the ATLAS Experiment of the Large Hadron Collider. Now, he’s focused on bringing more fun and curiosity to the world of science and research online.