I'm interested in checking my understanding of the appropriate method to price various derivatives. Here's what I got:
1. If it's a European option (no path-dependence), you can use a closed form solution, partial differential equations, numerical methods (i.e. finite difference method), equivalent martingale measures, or Monte Carlo simulation.
2. If it's a path-dependent derivative (American, Asian, Barrier), you need to use trees / lattices to solve for the price.
Two questions:
1. Does the above points sound right?
2. Is there some reason that Monte Carlo doesn't work for path dependence?
Please don't hesitate to point out any incorrect / mangled terminology. :toth:
1. If it's a European option (no path-dependence), you can use a closed form solution, partial differential equations, numerical methods (i.e. finite difference method), equivalent martingale measures, or Monte Carlo simulation.
2. If it's a path-dependent derivative (American, Asian, Barrier), you need to use trees / lattices to solve for the price.
Two questions:
1. Does the above points sound right?
2. Is there some reason that Monte Carlo doesn't work for path dependence?
Please don't hesitate to point out any incorrect / mangled terminology. :toth:
Methods to price derivatives
