PRICING ASIAN OPTION USING BLACK- SCHOLES MODEL AND MONTE CARLO SIMULATION

Abstract

Investment has been among the choices chosen to earn side income or profit. Investing is appealing because of its potential for significant gains but potential comes with risks. Netflix (NFLX), is a prime example of an asset that carries significant investment risk. NFLX has a volatility measurement Beta of 1.26 indicating a more volatile stock. This indicates that the stock price has fluctuated significantly over the past year. To handle the volatility, one of the most well-liked exotic options that depends on a path, Asian option, can reduce exposure to investment risk due to the way to exercise the option at the average price instead of the price during the maturity date. There are several methods used in pricing Asian option, such as Black Scholes Model and Monte Carlo Simulation. Black Scholes model is chosen because it has an analytical solution that can result in a theoretical price, and is widely used to price options. The second method used, Monte Carlo simulation is more versatile so it can handle the path-dependent nature of Asian options. This study examines the performance of the Monte Carlo simulation to the results of the Black Scholes model. The comparison is done by using MAPE, resulting in a discrepancy of 0% for the call option and 20.075366%, 19.833543%, and 19.484776% for put option of Monte Carlo simulation with number of simulations of 1000, 10,000, and 100,000 respectively.