# Tag Info

2

it certainly works best at the money. Why? I think it comes from the fact that Black's formula is approximately linear at the money. The approximation $$\frac{1}{\sqrt{2\pi}} \operatorname{SR} \sigma \sqrt{T} A,$$ with $A$ the annuity is remarkably good. One way of deducing these formulas is to do an asymptotic/Taylor expansion about $\sigma=0.$

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Glasserman's book is the book I would recommend on Monte Carlo methods as well.

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This is the book from a masters degree. http://perso.telecom-paristech.fr/~bianchi/athens/Proba_Num_11-12.pdf

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In order to define option price we should follow Black Scholes construction to construct riskless portfolio at t then to state that instantaneous rate of return of this portfolio equal risk free rate r ( t ) where r is a random on [ t , t + dt ] interval. We actually then arrive at the problem which could not be embedded in BS pricing world.

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