Monte Carlo simulation has been used to value options since Boyle's seminal paper. Monte Carlo simulation, however, has not been used to its fullest extent for option valuation because of the belief that the method is not feasible for American-style options. This paper demonstrates how to incorporate optimal early exercise in the Monte Carlo method of valuing options by linking forward-moving simulation and the backward-moving recursion of dynamic programming through an iterative search process. To demonstrate the potential of this method, we use it to value American-style options on the average price (or Asian options). The computational experience reveals a flexible valuation technique with potential for application to a range of securities and financial decision problems.option valuation, contingent claims valuation, Monte Carlo simulation, Asian options, average-price options, American options, path-dependent options, derivative securities

I am much indebted to Rick Brooks-Hill for first suggesting this line of research and helping me begin it.

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Expected utility maximizing farmers facing just price risk or both price risk and quantity risk behave similarly in the absence of a forward market. If forward contracting is possible, that is not true because variation in the commodity price affects a farmer's wealth through the value of his futures position, the value of his output and through the covariance between price and output. This covariance affects a farmer's optimal scale of production, his optimal forward position and the interrelationship between the scale of production and forward trading.