Monte Carlo Simulation for Derivative Pricing › Key Parameters
Michael BrenndoerferDecember 2, 20251 min read
Quantitative FinanceAll chapters Part 6 of 15Numerical Methods for Derivative Pricing
Monte Carlo Simulation for Derivative Pricing › Key ParametersOne section · Sections in this chapter5 / 13 ↓
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The key parameters for the Monte Carlo European option pricing model are:
- S0: Initial stock price. The starting value of the underlying asset.
- K: Strike price. The price at which you can buy (call) or sell (put) the asset.
- T: Time to maturity in years. The duration of the simulation.
- r: Risk-free interest rate. The constant rate at which the asset drifts under the risk-neutral measure.
- σ: Volatility of the underlying asset. Determines the magnitude of random price fluctuations.
- n_simulations: Number of simulated paths. Controls the precision of the estimate; higher reduces standard error.