medium · Quantitative Finance numerical
What is the primary advantage of using a 'control variate' in Monte Carlo simulation for pricing an arithmetic Asian option?
- Using the geometric Asian option's known closed-form price to reduce the estimator's variance.
- It substantially increases the raw speed of the underlying random number generator.
- It eliminates the need for a Cholesky decomposition of the full asset correlation matrix here.
- It ensures the simulation estimator converges in O(1/M) rather than the usual O(1/√(M)) rate.
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