Consider the mean-reverting process dSt = ( St)dt + StdWt. Create a time discretization of
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λ = 0.75
σ = 0.35
S0 = 40
Consider the cases where μ = 30 and μ = 50. Create a Monte-Carlo algorithm for pricing call options under this model. In order to do this, generate a random normal sample for each time step on each path in order to create an estimate for dSt at each time step. The stock price can be computed along each step as:
Here W is a normally distributed random variable with mean 0 and variance Δ.
Generate 1000 paths of 3 years by sampling daily. Using the Monte-Carlo paths generates calls prices for options at the following strikes: 30, 40, 50, 60, 70. Comment on the difference in prices caused by changing μ.
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Related Book For
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
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