2017 - 20th Annual Steven Galovich Memorial Student Symposium

Presentation Title

Can the past predict the future: Use of the Monte Carlo Simulation to value American, European and Asian options

Student Presenter(s) and Advisor

Gorica Malesevic, Lake Forest CollegeFollow

Location

Skybox

Abstract

This thesis examines the valuation methods used for pricing European and American call options that do not pay dividends. Options are financial instruments that play an important role in financial industry and are used in hedging, speculating and arbitraging. Because options are widely used in investing, there is a need for valuation methods that are as precise as possible. Options have been perceived as obscure financial instruments due to the lack of valuation techniques in the past. However, with the discovery of Black-Scholes Model in 1973, the first option valuation method, option trading escalated. In this thesis, the fair market value of S&P 500 index with European and American exercise style will be obtained by using the Black-Scholes Model, the Monte Carlo Simulation and the Cox-Ross Binomial Pricing Model. The results from three models will be compared and contrasted in order to determine the best valuation method.

Presentation Type

Individual Presentation

Start Date

4-11-2017 2:30 PM

End Date

4-11-2017 3:45 PM

Panel

Empirical Modeling in Finance and Statistics

Panel Moderator

Carolyn Tuttle

Field of Study for Presentation

Finance

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Apr 11th, 2:30 PM Apr 11th, 3:45 PM

Can the past predict the future: Use of the Monte Carlo Simulation to value American, European and Asian options

Skybox

This thesis examines the valuation methods used for pricing European and American call options that do not pay dividends. Options are financial instruments that play an important role in financial industry and are used in hedging, speculating and arbitraging. Because options are widely used in investing, there is a need for valuation methods that are as precise as possible. Options have been perceived as obscure financial instruments due to the lack of valuation techniques in the past. However, with the discovery of Black-Scholes Model in 1973, the first option valuation method, option trading escalated. In this thesis, the fair market value of S&P 500 index with European and American exercise style will be obtained by using the Black-Scholes Model, the Monte Carlo Simulation and the Cox-Ross Binomial Pricing Model. The results from three models will be compared and contrasted in order to determine the best valuation method.