18.20 Monte Carlo simulation When used to value european stock options, this involves the following steps 1. Simulate 1 path for the stock price in a risk neutral worId 2. Calculate the payoff from the stock option 3. Repeat steps 1 and 2 many times to get many sample payoff 4. Calculate mean payoff 5. Discount mean payoff at risk free rate to get an estimate of the value of the option Options, Futures, and Other Derivatives, 5th edition C 2002 by John C Hull18.20 Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull Monte Carlo Simulation When used to value European stock options, this involves the following steps: 1. Simulate 1 path for the stock price in a risk neutral world 2. Calculate the payoff from the stock option 3. Repeat steps 1 and 2 many times to get many sample payoff 4. Calculate mean payoff 5. Discount mean payoff at risk free rate to get an estimate of the value of the option