A joint application of the put-call-parity and importance sampling to variance reduced option pricing

Müller, Armin GND

Pricing derivatives with Monte-Carlo simulations involves standard errors that typically decrease at a rate proportional to N^−0.5 where N is the sample size. Several approaches have been discussed to reduce empirical variance for a given sample size. This paper analyzes the joint application of the put-call-parity approach and importance sampling to non-path-dependent and path-dependent options. Significant variance reduction is observed for in-the-money European and Arithmetic Asian options. For put options, synergies are realized in the sense that the total variance reduction effect achieved by the combined approach is higher than the effect explained by the two standalone approaches.

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Müller, Armin: A joint application of the put-call-parity and importance sampling to variance reduced option pricing. Hagen 2016. FernUniversität in Hagen.

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