Consider the linear SDE that represents the dynamics of a security price: dSt = 0.01Stdt + 0.05StdWt
Question:
dSt = 0.01Stdt + 0.05σStdWt
with S0 = 1 given. Suppose a European call option with expiration T = 1 and strike K = 1.5 is written on this security. Assume that the risk-free interest rate is 3%.
(a) Using your computer, generate five normally distributed random variables with mean zero and variance √2.
(b) Obtain one simulated trajectory for the St. Choose Δt = 0.2.
(c) Determine the value of the call at expiration.
(d) Now repeat the same experiment with five uniformly distributed random numbers, with appropriate mean and variances.
(e) If we conducted the same experiment 1000 times, would the calculated price differ significantly in two cases? Why?
(f) Can we combine the twoMonte-Carlo samples and calculate the option price using 2000 paths?
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
The following MatLab code can be used the generate the random normals and simulated stock paths in parts a through c a In the code above random normal...View the full answer
Answered By
Asim farooq
I have done MS finance and expertise in the field of Accounting, finance, cost accounting, security analysis and portfolio management and management, MS office is at my fingertips, I want my client to take advantage of my practical knowledge. I have been mentoring my client on a freelancer website from last two years, Currently I am working in Telecom company as a financial analyst and before that working as an accountant with Pepsi for one year. I also join a nonprofit organization as a finance assistant to my job duties are making payment to client after tax calculation, I have started my professional career from teaching I was teaching to a master's level student for two years in the evening.
My Expert Service
Financial accounting, Financial management, Cost accounting, Human resource management, Business communication and report writing. Financial accounting : • Journal entries • Financial statements including balance sheet, Profit & Loss account, Cash flow statement • Adjustment entries • Ratio analysis • Accounting concepts • Single entry accounting • Double entry accounting • Bills of exchange • Bank reconciliation statements Cost accounting : • Budgeting • Job order costing • Process costing • Cost of goods sold Financial management : • Capital budgeting • Net Present Value (NPV) • Internal Rate of Return (IRR) • Payback period • Discounted cash flows • Financial analysis • Capital assets pricing model • Simple interest, Compound interest & annuities
65+ Reviews
86+ Question Solved
Related Book For 
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
Question Posted:
