Application
As can be seen, Monte Carlo Methods are particularly useful in the valuation of options with multiple sources of uncertainty or with complicated features, which would make them difficult to value through a straightforward Black–Scholes-style or lattice based computation. The technique is thus widely used in valuing path dependent structures like lookback- and Asian options and in real options analysis. Additionally, as above, the modeller is not limited as to the probability distribution assumed.
Conversely, however, if an analytical technique for valuing the option exists—or even a numeric technique, such as a (modified) pricing tree —Monte Carlo methods will usually be too slow to be competitive. They are, in a sense, a method of last resort; see further under Monte Carlo methods in finance. With faster computing capability this computational constraint is less of a concern.
Read more about this topic: Monte Carlo Methods For Option Pricing
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