1 Foundations
1.1 Principles of Monte Carlo
1.1.1 Introduction
1.1.2 First Examples
1.1.3 Efficiency of Simulation Estimators
1.2 Principles of Derivatives Pricing
1.2.1 Pricing and Replication
1.2.2 Arbitrage and Risk-Neutral Pricing
1.2.3 Change of Numeraire
1.2.4 The Market Price of Risk
2 Generating Random Numbers and Random Variables
2.1 Random Number Generation
2.1.1 General Considerations
2.1.2 Linear Congruential Generators
2.1.3 Implementation of Linear Congruential Generators
2.1.4 Lattice Structure
2.1.5 Combined Generators and Other Methods
2.2 General Sampling Methods
2.2.1 Inverse Transform Method
2.2.2 Acceptance-Rejection Method
2.3 Normal Random Variables and Vectors
2.3.1 Basic Properties
2.3.2 Generating Univariate Normals
2.3.3 Generating Multivariate Normals
3 Generating Sample Paths
3.1 Brownian Motion
3.1.1 One Dimension
3.1.2 Multiple Dimensions
3.2 Geometric Brownian Motion
3.2.1 Basic Properties
3.2.2 Path-Dependent Options
3.2.3 Multiple Dimensions
3.3 Gaussian Short Rate Models
3.3.1 Basic Models and Simulation
3.3.2 Bond Prices
3.3 Multifactor Models
3.4 Square-Root Diffusions
3.4.1 Transition Density
3.4.2 Sampling Gamma and Poisson
3.4.3 Bond Prices
3.4.4 Extensions
3.5 Processes with Jumps
3.5.1 A Jump-Diffusion Model
3.5.2 Pure-Jump Processes
3.6 Forward Rate Models: Continuous Rates
3.6.1 The HJM Framework
3.6.2 The Discrete Drift
3.6.3 Implementation
3.7 Forward Rate Models: Simple Rates
3.7.1 LIBOR Market Model Dynamics
3.7.2 Pricing Derivatives
3.7.3 Simulation
3.7.4 Volatility Structure and Calibration
4 Variance Reduction Techniques
4.1 Control Variates
4.1.1 Method and Examples
4.1.2 Multiple Controls
4.1.3 Small-Sample Issues
4.1.4 Nonlinear Controls
4.2 Antithetic Variates
4.3 Stratified Sampling
4.3.1 Method and Examples
4.3.2 Applications
4.3.3 Poststratification
4.4 Latin Hypercube Sampling
4.5 Matching Underlying Assets
4.5.1 Moment Matching Through Path Adjustments
4.5.2 Weighted Monte Carlo
4.6 Importance Sampling
4.6.1 Principles and First Examples
4.6.2 Path-Dependent Options
4.7 Concluding Remarks
5 Quasi-Monte Carlo
6 Discretization Methods
7 Estimating Sensitivities
8 Pricing American Options
9 Applications in Risk Management
A Appendix: Convergence and Confidence Intervals
B Appendix: Results from Stochastic Calculus
C Appendix: The Term Structure of Interest Rates
References
Index