This time: Computational efficiency trade-off & more variance reduction.

New experiment: 1000 runs of length 100,000

Moment matching: Enforce the truth.

Average price estimate
Average naive -range:
True -range:

Importance sampling: Go where its happening.

Simple
6.4443
0.0743
0.0699

Simulation method
MM1
MM2
MM3
6.4388 6.4403 6.4384
0.0742 0.0742 0.0742
0.0471 0.0184 0.0423

MM4
6.4387
0.0742
0.0151

Other words: Stratification; low-discrepancy sequences.

So the(se) MM-estimators are better than they appear!
And then: Simulating from SDEs when you dont have a closed-form
solution.

Or: Footnote 7 in the [BBG]-article is dead right.

Last time: Variance reduction (Seydel 3.5, [BBG]-article app. 126776).

Anti-thetic:
N (0, 1) N (0, 1). Good if pay-off is monotone, bad if its symmetric.
Control variate:
Find similar problem with known solution. Somewhat of an art, but
a manageable one.
Both methods are idiot-proof: Things cant go horribly wrong &
we can easily tell if theres an improvement.
1

Simulation in the Black-Scholes model. Parameters: S(0) = 100,

K = 110, T = 1, r = 0.06, = 0.2, # simulations = N = 100,000.
True Black-Scholes call-price = 6.437275
Moment matching, I: 1 run of length 100,000

Price estimate
Naive -range:

Simple
6.4144
0.0743

Simulation method
MM1
MM2
MM3
6.4245 6.4469 6.4255
0.0743 0.0746 0.0743

MM4
6.4324
0.0744

Better mean, same standard deviation: Hmmm, thats the opposite

of what youd think. Can this really be?
3

3
1

std. dev(Z)

Importance improvement for deep otm call

0.6

0.8

1.0

1 e02

0.4

drift after change

5 e03

0.010

|E(X(T))E(Y(T)))|

0.008
0.006

|E(X(T))E(Y(T))|
0.010

0.020

0.030

5 e04

0.000

0.002

0.004

0.006
0.004
0.000

0.000

1000

2000

3000

4000

5 e04

#steps, n

5 e03
stepsize, h

0.4

0.4

0.2
0.1

E(|X(T)Y(T)|)

0.3
0.2

E(|X(T)Y(T)|)

0.2

E(|X(T)Y(T)|)

0.3

0.3

0.4

10

stepsize, h

0.0

0.1

0.2

0.3

0.4

drift after change

0.5

0.6

0.1

0.1

std. dev(Z)

12

0.002

14

16

|E(X(T))E(Y(T))|

0.008

0.010

Importance improvement for roundthemoney call

2 e03

0.2

1 e03

0.0

0.7

0.000

0.010

0.020

stepsize, h

0.030

1000

2000
#steps, n

3000

4000

5 e04

5 e03
#steps, n