Research on the option pricing of Amazon and Google based on B-S model and Monte Carlo simulation

Abstract

The emergence of financial derivatives has helped people to effectively hedge the risks present in the financial markets while giving them the ability to make leveraged investments in the financial markets. Although derivatives did not originate in the financial market, it still has a huge role in the financial market so far. In recent years, science and technology innovation is known as a growing concern for governments due to factors such as environmental issues. In this paper, we choose to study the financial derivative, European call option pricing problem of technology-based companies AMZN and GOOGL. In this paper, the European call options of these two companies are priced by using the BSM model, and the results predicted by the BSM model are improved by using Monte Carlo Simulation. Ultimately, the paper finds that Monte Carlo Simulation prices European call options on technology-based firms nearly three times higher than those priced by the BSM model. The results suggest that using a single model to price European call options on technology-based firms is inaccurate. The purpose of this paper is to help investors in pricing European call options on technology-based firms and to warn investors about the inaccuracy of a single option pricing model.