Explain decision features in Monte Carlo method

Question

Explain decision features in Monte Carlo method.

Answer 1

Decision features: While you have a contract with embedded decisions the Monte Carlo method turns into cumbersome. This is simply the main disadvantage for simulation methods. When we utilize the Monte Carlo method we only get the option value at today’s stock price and time. But to rightly price an American option, say, we require to know what the option value would be at each point in stock price-time space. We don’t classically find it as part of the Monte Carlo solution.