Abstract
This chapter’s two parts develop key ideas from two fields, the intersection of which is the topic of this book. Section 1.1 develops principles underlying the use and analysis of Monte Carlo methods. It begins with a general description and simple examples of Monte Carlo, and then develops a framework for measuring the efficiency of Monte Carlo estimators. Section 1.2 reviews concepts from the theory of derivatives pricing, including pricing by replication, the absence of arbitrage, risk-neutral probabilities, and market completeness. The most important idea for our purposes is the representation of derivative prices as expectations, because this representation underlies the application of Monte Carlo.
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© 2004 Springer Science+Business Media New York
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Glasserman, P. (2004). Foundations. In: Monte Carlo Methods in Financial Engineering. Stochastic Modelling and Applied Probability, vol 53. Springer, New York, NY. https://doi.org/10.1007/978-0-387-21617-1_1
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DOI: https://doi.org/10.1007/978-0-387-21617-1_1
Publisher Name: Springer, New York, NY
Print ISBN: 978-1-4419-1822-2
Online ISBN: 978-0-387-21617-1
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