ABSTRACT
Two simulation methods are described in this chapter. Glasserman type methods [44], [45] avoid bias from drifts by discretizing the SDEs of positive continuous time martingales, and produce accurate results for time steps of the order of a couple of weeks. Big-step methods [90] use predictor-corrector techniques to approximate drift and volatility, and step in intervals of years between decision times (like Bermudan exercises). The author strongly recommends Glassermans’s book ‘Monte Carlo Methods in Financial Engineering’ [46] as a reference for this chapter.
