Asian Option Pricing by Monte Carlo Simulation

Inputs Output
X 100 mean 86.94
rrf 4.00% FV 0.00
σ 20.00% PV 0.00
T 0.50
P0 100
nSteps 180 stepSize 0.002778

t N(0,1) dp p P
0 4.6052 100.00
1 2.0880 2.21% 4.6272 102.23
2 -2.0007 -2.10% 4.6062 100.10
3 0.2175 0.23% 4.6086 100.34
4 0.8594 0.91% 4.6177 101.26
5 -0.8775 -0.92% 4.6085 100.33
6 2.1135 2.23% 4.6308 102.60
7 -0.3241 -0.34% 4.6274 102.25
8 -0.3189 -0.33% 4.6241 101.91
9 -0.2135 -0.22% 4.6219 101.69
10 0.3923 0.42% 4.6261 102.12
11 0.8833 0.94% 4.6355 103.08
12 0.8336 0.88% 4.6443 104.00
13 0.9228 0.98% 4.6541 105.02
14 -1.8091 -1.90% 4.6351 103.04
15 -1.0749 -1.13% 4.6238 101.88
16 1.0921 1.16% 4.6354 103.07
17 -1.3096 -1.37% 4.6217 101.66
18 -1.0865 -1.14% 4.6103 100.51
19 -1.0140 -1.06% 4.5996 99.45
20 -1.5657 -1.64% 4.5832 97.82
21 -0.5851 -0.61% 4.5771 97.23
22 0.3972 0.42% 4.5813 97.64
23 1.1343 1.20% 4.5933 98.82
24 2.7668 2.92% 4.6225 101.75
25 -3.0735 -3.23% 4.5902 98.51
26 -0.4646 -0.48% 4.5854 98.04
27 -1.5126 -1.59% 4.5695 96.49
28 -1.5224 -1.60% 4.5535 94.96
29 0.0152 0.02% 4.5537 94.98
30 1.5555 1.65% 4.5701 96.56
31 -1.0818 -1.13% 4.5588 95.47
32 -0.6058 -0.63% 4.5525 94.87
33 -0.4788 -0.50% 4.5475 94.39
34 0.7607 0.81% 4.5555 95.16
35 -0.5414 -0.57% 4.5499 94.62
36 -0.1165 -0.12% 4.5487 94.51
37 0.3786 0.40% 4.5528 94.90
38 0.1904 0.21% 4.5548 95.09
39 0.0478 0.06% 4.5554 95.14
40 -1.0607 -1.11% 4.5443 94.09
41 0.0057 0.01% 4.5444 94.10
42 0.4129 0.44% 4.5488 94.52
43 -2.3234 -2.44% 4.5244 92.24
44 0.3206 0.34% 4.5278 92.55
45 1.9334 2.04% 4.5482 94.46
46 1.7405 1.84% 4.5666 96.22
47 -0.7415 -0.78% 4.5589 95.48
48 -1.3235 -1.39% 4.5450 94.16
49 -0.6463 -0.68% 4.5382 93.52
50 0.4403 0.47% 4.5429 93.96
51 1.9031 2.01% 4.5630 95.87
52 -0.8020 -0.84% 4.5546 95.07
53 0.4187 0.45% 4.5591 95.50
54 0.2516 0.27% 4.5618 95.76
55 -1.5746 -1.65% 4.5453 94.19
56 -1.2981 -1.36% 4.5316 92.91
57 0.2745 0.29% 4.5346 93.18
58 -0.8269 -0.87% 4.5259 92.38
59 -0.4334 -0.45% 4.5214 91.97
60 -0.0761 -0.07% 4.5207 91.90
61 -0.1253 -0.13% 4.5194 91.78
62 -2.8203 -2.97% 4.4897 89.10
63 -0.6814 -0.71% 4.4826 88.46
64 -0.0008 0.00% 4.4826 88.47
65 0.3209 0.34% 4.4861 88.77
66 -0.3094 -0.32% 4.4829 88.49
67 0.0924 0.10% 4.4839 88.58
68 -0.7763 -0.81% 4.4758 87.86
69 -0.6058 -0.63% 4.4695 87.31
70 1.7909 1.89% 4.4884 88.98
71 0.9698 1.03% 4.4987 89.90
72 0.2489 0.27% 4.5013 90.14
73 1.6487 1.74% 4.5188 91.72
74 -0.4105 -0.43% 4.5145 91.33
75 -0.8271 -0.87% 4.5058 90.54
76 0.3361 0.36% 4.5094 90.87
77 -0.3412 -0.35% 4.5059 90.55
78 0.7281 0.77% 4.5136 91.25
79 0.3025 0.32% 4.5169 91.55
80 -1.0698 -1.12% 4.5057 90.53
81 -1.3238 -1.39% 4.4918 89.28
82 -2.1643 -2.28% 4.4690 87.27
83 -2.0233 -2.13% 4.4477 85.43
84 -0.7624 -0.80% 4.4397 84.75
 85 0.7512 0.80% 4.4477 85.43
86 1.9986 2.11% 4.4688 87.26
87 -1.1154 -1.17% 4.4571 86.24
88 -0.1886 -0.19% 4.4552 86.07
89 -1.2241 -1.28% 4.4424 84.98
90 0.1121 0.12% 4.4436 85.08
91 -0.1446 -0.15% 4.4421 84.96
92 -2.1916 -2.30% 4.4191 83.02
93 -1.2564 -1.32% 4.4059 81.93
94 -0.4633 -0.48% 4.4011 81.54
95 -1.4932 -1.57% 4.3854 80.27
96 -0.2752 -0.28% 4.3825 80.04
97 -0.0877 -0.09% 4.3817 79.97
98 -2.3916 -2.52% 4.3565 77.98
99 -0.9088 -0.95% 4.3470 77.25
100 0.7454 0.79% 4.3549 77.86
101 -3.6175 -3.81% 4.3168 74.95
102 0.7765 0.82% 4.3251 75.57
103 0.2651 0.29% 4.3279 75.79
104 -0.0653 -0.06% 4.3273 75.74
105 -0.4931 -0.51% 4.3221 75.35
106 -0.3175 -0.33% 4.3188 75.10
107 0.8462 0.90% 4.3278 75.78
108 0.0646 0.07% 4.3286 75.83
109 -0.6752 -0.71% 4.3215 75.30
110 0.9207 0.98% 4.3313 76.04
111 0.3576 0.38% 4.3351 76.33
112 -0.0787 -0.08% 4.3343 76.27
113 -0.5066 -0.53% 4.3290 75.87
114 0.9993 1.06% 4.3396 76.68
115 -0.2253 -0.23% 4.3373 76.50
116 1.8851 1.99% 4.3572 78.04
117 0.5995 0.64% 4.3636 78.54
118 1.0511 1.11% 4.3747 79.42
119 0.9648 1.02% 4.3850 80.23
120 1.0406 1.10% 4.3960 81.12
121 0.9752 1.03% 4.4063 81.97
122 -0.3892 -0.40% 4.4023 81.64
123 -0.1847 -0.19% 4.4004 81.48
124 -0.8373 -0.88% 4.3916 80.77
125 1.1824 1.25% 4.4041 81.79
126 -1.7013 -1.79% 4.3863 80.34
127 -1.6278 -1.71% 4.3691 78.98
128 -1.0642 -1.12% 4.3580 78.10
129 0.2058 0.22% 4.3602 78.27
130 0.5954 0.63% 4.3665 78.77
131 2.7689 2.92% 4.3958 81.11
132 1.3790 1.46% 4.4104 82.30
133 0.6273 0.67% 4.4170 82.85
134 -0.5065 -0.53% 4.4118 82.41
135 -0.4459 -0.46% 4.4071 82.03
136 -0.4807 -0.50% 4.4021 81.62
137 -0.8047 -0.84% 4.3937 80.94
138 -0.3553 -0.37% 4.3900 80.64
139 0.1128 0.12% 4.3912 80.74
140 -1.3613 -1.43% 4.3769 79.59
141 0.8296 0.88% 4.3857 80.30
142 -0.4758 -0.50% 4.3808 79.90
143 1.4227 1.51% 4.3958 81.11
144 -1.8619 -1.96% 4.3763 79.54
145 0.1248 0.14% 4.3776 79.65
146 0.6407 0.68% 4.3844 80.19
147 -0.3977 -0.41% 4.3803 79.86
148 -1.0792 -1.13% 4.3690 78.96
149 1.0377 1.10% 4.3800 79.84
150 0.1337 0.15% 4.3814 79.95
151 -1.3186 -1.38% 4.3676 78.85
152 -1.0493 -1.10% 4.3566 77.99
153 -0.7897 -0.83% 4.3483 77.35
154 0.2675 0.29% 4.3512 77.57
155 0.4709 0.50% 4.3562 77.96
156 0.5473 0.58% 4.3620 78.42
157 0.8221 0.87% 4.3708 79.10
158 -0.2712 -0.28% 4.3680 78.88
159 0.4626 0.49% 4.3729 79.27
160 0.5784 0.62% 4.3790 79.76
161 -1.1435 -1.20% 4.3670 78.81
162 0.5596 0.60% 4.3730 79.28
163 0.2021 0.22% 4.3752 79.45
164 1.5130 1.60% 4.3912 80.74
165 -0.2960 -0.31% 4.3881 80.49
166 0.0001 0.01% 4.3882 80.49
167 -0.1833 -0.19% 4.3863 80.34
168 0.0879 0.10% 4.3873 80.42
169 -1.7296 -1.82% 4.3691 78.97
170 -0.8256 -0.86% 4.3605 78.29
171 0.3428 0.37% 4.3641 78.58
172 0.4380 0.47% 4.3688 78.95
173 1.2290 1.30% 4.3818 79.98
174 -0.3177 -0.33% 4.3785 79.72
175 1.0185 1.08% 4.3893 80.59
176 0.4178 0.45% 4.3938 80.95
177 0.3162 0.34% 4.3972 81.22
178 -0.6225 -0.65% 4.3907 80.69
179 0.3842 0.41% 4.3948 81.03
180 -0.0010 0.00% 4.3948 81.03
 PV distribution
mean 0.00 This is our estimate of the price of the option.
s.d. 0.00
s.d. of mean 0.00
Disclaimer:
This workbook shows how – in theory – a Monte Carlo simulation could be used to
price complex derivatives. The model is very simplistic. If you are evaluating an actual
derivative, you may need a more complex model, and some of the assumptions made
Data Table here might not be applicable.
trial PV
0.00 The Model:
1 0.00 To price a derivative using a Monte Carlo simulation, we use risk-neutral pricing. It is
outside the scope of Mathematics and Statistics for Risk Management, but basically
2 0.00 we set the mean of the returns to the risk-free rate, in order to evaluate the price,
3 0.00 even if we believe the actual mean is different. Many books on options pricing or
4 0.00 quantitative finance include descriptions of this technique. See, for example, Wilmott
(2001).
5 0.00
6 0.00 In this specific example we are pricing a fixed strike arithmetic Asian call. At expiry, the
7 0.00 value of the option is the maximum of zero, and the mean price of the underlying
8 0.00 minus the strike. The strike price of the option, X, the initial price of the underlying
security, P0, and the time to expiry, T, can be set in the Inputs table.
9 0.00
10 0.00 In each period, a random draw from a standard normal distribution is generated using
11 0.00 Excel's RAND function. These draws are in the column N(0,1). Hitting F9 will cause
12 0.00 the random variable to recalculate.
13 0.00 A draw from the normal distribution is used to calculate the change in the option's
14 0.00 price in each period. The price changes are, in turn, used to construct a simulated
15 0.00 price path. First log prices, p, are calculated, then standard prices, P. The mean price
16 0.00 along the path is used to determine the future value of the option, FV. To get the value
of the option today we calculate the present value, PV.
17 0.00
18 0.00 The PV is calculated multiple times using an Excel Data Table. If you are unfamiliar
19 0.00 with Excel's Data Table feature, you should consult Excel's help section. The Data Table
20 0.00 is an easy way to construct a simple Monte Carlo simulation. Each row in the Data
Table is recalculated with a new set of random draws from our normal random
21 0.00 variables. It is as if we had pressed F9 multiple times and recorded resulting PV each
22 0.00 time. Because we do not need to change any other cells, we can set the column input
23 0.00 cell to any empty cell in the workbook.
24 0.00 Finally, the mean of the various trials is calculated. This would be our estimate of the
25 0.00 present value of the option. To get an idea of how reliable this estimate is, the
26 0.00 standard deviation of the mean is calculated (this topic is covered in Chapter 5).
27 0.00 Increasing the number of trials will —all other things being equal—decrease the
standard deviation of the mean.
28 0.00
29 0.00
30 0.00
31 0.00
32 0.00
33 0.00
34 0.00
35 0.00
36 0.00
37 0.00
38 0.00
39 0.00
40 0.00
41 0.00
42 0.00
43 0.00
44 0.00
45 0.00
46 0.00
47 0.00
48 0.00
49 0.00
50 0.00
51 0.00
52 0.00
53 0.00
54 0.00
55 0.00
56 0.00
57 0.00
58 0.00
59 0.00
60 0.00
61 0.00
62 0.00
63 0.00
64 0.00
65 0.00
66 0.00
67 0.00
68 0.00
69 0.00
70 0.00
71 0.00
72 0.00
73 0.00
74 0.00
75 0.00
76 0.00
77 0.00
78 0.00
79 0.00
80 0.00
81 0.00
82 0.00
83 0.00
84 0.00
 85 0.00
86 0.00
87 0.00
88 0.00
89 0.00
90 0.00
91 0.00
92 0.00
93 0.00
94 0.00
95 0.00
96 0.00
97 0.00
98 0.00
99 0.00
100 0.00
 uld be used to
aluating an actual For Data Table
sumptions made
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tral pricing. It is
nt, but basically
ate the price,
ons pricing or
example, Wilmott

call. At expiry, the

e underlying
the underlying

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n the option's
ct a simulated
The mean price
V. To get the value

are unfamiliar
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References:

Wilmott, Paul. Paul Wilmott Introduces Quantitative Finance.

Wiley, 2001.