MCOV

Open Source Monte Carlo Option Valuer

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The Monte Carlo Method This is an excerpt from mcovaluer.h. // ------------------------------------------------------ // The Monte Carlo Method // // The MCOV software uses a Monte Carlo method. The price // of the underlying instrument (stock/future/index) is // projected, day by day, until the option is sold or // expires. When this happens, the value of the option // is estimated; if the option was not sold, this value // is zero. This process is repeated many times, // generating many different values for the option. // // The MCOV software estimates the value of the option // as the average of the set of generated values (some // of which are zero). // // A new day is projected from the latest day by: // - picking a 'prototype' day from the price-history // - identifying the changes during the prototype day // (starting from the previous close) // - applying the same changes to the latest day to // project the new day // // The user of the application will generally use // price-history data that includes some amount of the // past up to today, plus, perhaps, additional data from // other periods in the past. // // When an option is sold or expires, and its value is // estimated, a simplistic method is used to estimate // the remaining time value. Therefore, The MCOV // software works best if the option is sold when the // time value is relatively low: // - because the option will expire soon, or, // - because the option is very deep in the money. // // // ------------------------------------------------------