# Least Squares Monte Carlo

*Quant & Pricing — Finicade finance glossary*

Least squares Monte Carlo prices early-exercise options by simulating paths forward, then regressing to estimate the continuation value at each step.

Least squares Monte Carlo prices early-exercise options by simulating paths forward, then regressing future payoffs on current state to estimate the continuation value at each step. It solved the long-standing problem that simulation runs forward while exercise decisions require working backward. The estimate is biased by the choice of regression basis functions, so production implementations test convergence against a lattice wherever one exists.

**Also known as:** Longstaff-Schwartz, LSM, American Monte Carlo

**Related terms:** [Monte Carlo Simulation](https://finicade.com/glossary/monte-carlo), [American Option](https://finicade.com/glossary/american-options), [Backward Induction](https://finicade.com/glossary/backward-induction), [Regression](https://finicade.com/glossary/regression), [Path Dependence](https://finicade.com/glossary/path-dependence)

Source: https://finicade.com/glossary/least-squares-monte-carlo