SUMMARY

• An edited collection of new writing and reference papers structured to provide a unique routemap through Monte Carlo

• Selected and introduced by leading practitioner and theoretician, Bruno Dupire

• Covers pricing, Monte Carlo methodologies, yield curve models, fixed income and generalities

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  TABLE OF CONTENTS

CONTENTS

Authors
Introduction
Bruno Dupire of Nikko Financial Products

GENERALITIES
Options: A Monte Carlo Approach
Phelim P. Boyle of University of Waterloo
Monte Carlo Methods for Security Pricing
Phelim P. Boyle of University of Waterloo, Mark Broadie and Paul Glasserman of Columbia University
Monte Carlo Toolkit
Bruno Dupire of Nikko Financial Products

PRICING
Dimension Reduction and Other Ways of Speeding Monte Carlo Simulation
Bruno Dupire of Nikko Financial Products and Antoine Savine of General Re Financial Products
Average Intelligence
Edmond Levy of HSBC MIDLAND and Stuart Turnbull of Queens University, Canada
Beyond Average Intelligence
Michael Curran of RiskCare Ltd
Strata Gems
Michael Curran of RiskCare Ltd
Recovering Identity
Michael Curran of RiskCare Ltd
Greeks in Monte Carlo
Michael Curran of RiskCare Ltd
Quicker on the Curves
Les Clewlow of University of Warwick and Andrew Carverhill of the University of Science and Technology, Hong Kong
Exact Exotics
Leif Andersen and Rupert Brotherton-Ratcliffe of General Re Financial Products
Monte Carlo Simulation of Options on Joint Minima and Maxima
Leif Andersen of General Re Financial Products
Model Calibration in the Monte Carlo Framework
Raphaël Douady of Ecole Normale Supérieure, CMLA

AMERICAN-STYLE
Valuing American Options in a Path-Simulation Model
James A. Tilley of Morgan Stanley
Numerical Valuation of High-Dimensional Multivariate American Securities
Jérôme Barraquand of Salomon Brothers International and Didier Martineau of Long-Term Captial Management
Monte Carlo Methods for Pricing High-Dimensional American Options: An Overview
Mark Broadie and Paul Glasserman of Columbia University

FIXED INCOME
Pricing Interst Rate Exotics by Monte Carlo Simulation
Les Clewlow of Lacima Consultants Ltd, Warwick Business School and Chris Strickland of the University of Technology, Sydney, Australia
Efficient and Flexible Bond Option Valuation in the Heath, Jarrow and Morton Framework
Andrew Carverhill of Hong Kong University of Science and Technology and Kin Pang of Morgan Stanley Dean Witter&Co
Term Structure Dynamics and Mortgage Valuation
Oren Cheyette of BARRA Inc

VAR
Calculating Value-at-Risk with Monte Carlo Simulation
Evan Picoult of Citibank
Beyond VAR and Stress Testing
Julian Shaw of NatWest Markets
Using Non-Normal Monte Carlo Simulation to Compute Value-at-Risk
Gerald D. Quinlan of TrueRisk Inc
Scrambled Nets for Value-at-Risk Calculations
Art Owen of Stanford University and Domingo Tavella of Align Risk Analysis

DETERMINISTIC METHODS
Quasi-Monte Carlo Methods in Numberical Finance
Corwin Joy of Positron Energy Consulting, Phelim P. Boyle and Ken Seng Tan of University of Waterloo
New Methodologies for Valuiing Derivatives
Spassimir H. Paskov of Barclays Capital
Valuation of Mortgage-Backed Securities Using Brownian Bridges to Reduce Effective Dimension
Russel E. Caflisch of UCLA, William Morokoff of Goldman Sachs and Art Owen of Stanford University
Smoothness and Dimension Reduction in Quasi-Monte Carlo Methods
Bradley Moskowitz of Bettis Laboratory and Russel E. Caflisch of UCLA
Beating Monte Carlo
Anargyros Papageorgiou and Joseph Traub of Columbia University
Monte Carlo Motoring
Rupert Brotherton-Ratcliffe of General RE Financial Products
Laudable Lattices
Craig Stetson of Arizona Public Service, Steve Marshall and David Loebell of Chase Manhattan
Inelegant Efficiency
John Barrett and Gerald Moore of Imperial College and Paul Wilmott of Imperial College and University of Oxford
Glossary of Monte Carlo terms

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  QUOTES

″Dupire puts Monte Carlo in a logical framework... excellent introductions to each section summarising the papers clearly.″
Rich Tannenbaum, Savvysoft

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  REVIEW

Reviewed by Rich Tanenbaum, Savvysoft

This book strives to describe Monte Carlo in full, including every procedure needed to implement state-of-the-art simulation techniques. It is an ambitious goal, and the book largely succeeds, by means of original research papers and chapters written by authors re-explaining in plain English concepts that others have uncovered.

The book covers the use of Monte Carlo for pricing, approaches for valuing American style options, VAR and several deterministic methods for carrying out Monte Carlo. It rises above the ubiquitous finance handbooks because it generally provides enough information for readers to reproduce the ideas presented.

The book explores various tricks for obtaining sound results with ever fewer simulations. These involve two types of techniques: control variates and the use of ″good″ random numbers.

Control variates simulate two assets using the same random numbers: the option in question (A) and a similar asset (B) whose value we know from a formula (B'). The final value is A+B' -B. The notion of using ″good″ random numbers (called deterministic methods, since the numbers are no longer random) covers techniques that all boil down to the same concept: evenly dispersed random numbers give better results than random numbers that cluster in some spots, and miss other spots completely. In short control variates adjust the output, and deterministic methods adjust the inputs. The good news is that these two methodologies are not mutually exclusive.

On the whole Dupire has done a fine job of organising a random set of papers on Monte Carlo into a logical framework. He has also written excellent introductions to each section summarising the papers clearly. This makes the book almost as much fun as visiting the casino.

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  CONTRIBUTORS

Bruno Dupire; Phelim P. Boyle ; Monte Carlo Toolkit ; Bruno Dupire ; Edmond Levy ; Michael Curran; Les Clewlow ; Leif Andersen and Rupert Brotherton-Ratcliffe ; Raphaël Douady; James A. Tilley ; Jérôme Barraquand; Mark Broadie and Paul Glasserman; Les Clewlow ; Andrew Carverhill ; Oren Cheyette; Julian Shaw ; Gerald D. Quinlan; Art OwenCorwin Joy ; Spassimir H. Paskov ; Russel E. Caflisch; Bradley Moskowitz; Anargyros Papageorgiou and Joseph Traub ; Rupert Brotherton-Ratcliffe ; Craig Stetson ; John Barrett and Gerald Moore
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