Skip to content
All library documents

A Simple Exercise-Threshold Rule for Monte Carlo American Options

Article Quant Q&A · Author: james
Read the original

Summary

The document asks how to extend an Excel Monte Carlo pricer to value American options, which allow exercise before expiration. It mentions least-squares methods associated with Longstaff and Schwartz, but the questioner finds that approach difficult to implement in Excel and asks about coding it in VBA.

The reply suggests a simpler approximation: exercise when the simulated stock price crosses a threshold, then choose the threshold that maximizes the estimated option value. The threshold could be constant or vary across states. This offers an accessible way to represent early exercise, but the document gives no implementation details, validation, or comparison with least-squares Monte Carlo. Its accuracy will depend on whether the chosen rule captures the option’s actual exercise boundary.

Key ideas

  • American options can be exercised before expiration, so a Monte Carlo pricer needs an early-exercise decision rule.
  • The document mentions least-squares Monte Carlo as a method the questioner is considering.
  • A simpler proposed approximation exercises when the underlying price crosses a chosen threshold.
  • The threshold can be selected to maximize estimated option value, but the document provides no accuracy assessment.

Tags

OptionsDerivatives pricingBacktesting
Full text
# I built a monte carlo simulation option pricer in excel. How do i modify it to price american options?


# I built a monte carlo simulation option pricer in excel. How do i modify it to price american options?












I see several methods to modify the monte carlo model to price american option payoffs. However, the math looks a little too complex to model into excel - i am looking at the least square methods by longstaff and schwartz 2003.

how can this be coded into vba?

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/35191

How about trying a simple rule for early exercise. For example , exercise if stock > X, where C could be a constant or a vector. Chose X to maximize the option value.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.