Monte Carlo Simulation and the Early Exercise Problem
Phelim Boyle introduced Monte Carlo simulation as method to value complex options. Boyle’s innovation was not used to value options with an early exercise feature. Hull observed, “One limitation of the Monte Carlo approach is that it can be used only for European-style derivative securities.” In 1993 Tilley published a procedure for incorporating early exercise in a Monte Carlo simulation. In that same year, my colleagues, Gautam Vora and David Weeks independently developed an alternative approach, that we describe in the article shown here.