Pricing the Call Option with the Monte Carlo Method

A European-style call option gives the right, but not the obligation, to "call" for a stock at a specified "strike" price K at a specified time T If the stock price at time is such that , the option holder "exercises" and collects from the seller of the option. If , the option expires worthless In either case the seller of the option collects a fee called the "premium" for entering into the agreement. We want to find out what that premium should be
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Financial Derivatives
We want to predict the price on a stock at time T. Black-scholes assumes a Brownian motion (random walk) to figure out what is most likely to happen to the price of a stock after time T To apply this to the Monte Carlo Method we will run many possible Brownian walks of a stock over some period of time T The method we will use is: 1. Perform many sample walks of the stock 2. Compute the value of the derivative for each sample walk 3. Average all the derivative values together to come up with an expected value for the derivative
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