Application and Accuracy Comparison of Monte Carlo Simulation and Binomial Tree Model in Pricing CSI 300 Income Certificates

Abstract

This paper takes Huatai Securities’ Juyi No. 25054 two-way shark fin income certificate linked to the CSI 300 Index as the research object, comparing the applicability and accuracy of Monte Carlo (MC) simulation and Binomial Tree (BT) model in pricing structured products. Based on the actual terms of the product, pricing analysis is conducted using MC simulation (incorporating variance reduction techniques) and an optimized BT model (matching observation day nodes), with comparisons made from the dimensions of accuracy, efficiency, and sensitivity. The study finds that in short-term and low-volatility scenarios, the pricing results of the two models are highly consistent. The BT model has an advantage in computational efficiency, while MC simulation is more sensitive to capturing extreme price fluctuations. There is a positive correlation between volatility and product prices, a feature that differs from knock-out-dominated products, highlighting the impact of product design on pricing. The conclusions provide references for model selection in practice: the BT model is suitable for routine pricing of short-term products, while MC simulation is more appropriate for stress testing and pricing of complex-structured products.