👉 Option computing is a method used to price and hedge exotic options, particularly those with complex payoff structures, by simulating the underlying asset's price paths over time and calculating the expected payoffs at expiration. This approach is especially useful for options that cannot be easily priced using traditional analytical models like the Black-Scholes formula due to their path-dependent features or early exercise options. In option computing, a large number of simulated price paths are generated based on stochastic models, such as geometric Brownian motion or more sophisticated models that account for volatility smiles and skews. The payoffs of these options are then computed for each path, and the average payoff is discounted back to the present value using risk-neutral probabilities to derive the option's price. This technique provides a more accurate representation of the option's value, especially for path-dependent options, by capturing the full range of possible price movements and their associated probabilities.
