(a) Price the option in Problem 7 by Monte Carlo. Use the Numerical Integration algorithm. (b) Same...

Question:

(a) Price the option in Problem 7 by Monte Carlo. Use the Numerical Integration algorithm.

(b) Same question using Algorithm 13. How many trials are required to get 3 correct digits in both? What are the runs times for both?

Data in Problem 7

Use a 4-step binomial tree to price a call option with these particulars: S₀ = 36, K = 34, r = 0.02, σ = 0.3, T = 4 weeks (28 days).

Data in Algorithm 12

inputs: So, u, o, T, r, N a = log So + T-0T >see (3.42) 820T E=0 for i= 1,..., N Z~ N(0,1) Y = eZ+a E = E

Data in Algorithm 13

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Finance With Monte Carlo

ISBN: 9781461485100

2013th Edition

Authors: Ronald W. Shonkwiler

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Question Posted: Oct 03, 2023 06:25 AM

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(a) Price the option in Problem 7 by Monte Carlo. Use the Numerical Integration algorithm. (b) Same...

Question:

inputs: So, p, o, T, r, N alog So + μTo²T >see (3.42) 820²T E=0 for i=1,..., N Z~ N(0,1) Y = e³Z+a E = E +G(Y) end for E = E/N option price ▷see (3.43) e-TE

Step by Step Answer:

The question refers to pricing a call option using Monte Carlo methods as described by two algorithms Algorithm 12 and Algorithm 13 Before proceeding with the simulation lets clarify the parameters gi...View the full answer

Finance With Monte Carlo

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