(a) State whether or not the Binomial Method and the Monte Carlo method are naturally suited...

 

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(a) State whether or not the Binomial Method and the Monte Carlo method are naturally suited to computing accurate approximations of the following options. (i) A Bermudan call option. (ii) A Strathclyde call option, which has a payoff at expiry date T given by maxost≤r S(t)- minoster S(t). (iii) A Bonus call option, which has a payoff at expiry date 7 given by S(T) if S(T) ≥ E and E if S(T) < E. (b) Suppose 106 asset paths were used in a Monte Carlo method to approximate an option value, producing a confidence interval of width 10-1. Roughly how many asset paths would be needed to produce a confidence interval of width 10-3? (6,2 marks) (a) State whether or not the Binomial Method and the Monte Carlo method are naturally suited to computing accurate approximations of the following options. (i) A Bermudan call option. (ii) A Strathclyde call option, which has a payoff at expiry date T given by maxost≤r S(t)- minoster S(t). (iii) A Bonus call option, which has a payoff at expiry date 7 given by S(T) if S(T) ≥ E and E if S(T) < E. (b) Suppose 106 asset paths were used in a Monte Carlo method to approximate an option value, producing a confidence interval of width 10-1. Roughly how many asset paths would be needed to produce a confidence interval of width 10-3? (6,2 marks) (a) State whether or not the Binomial Method and the Monte Carlo method are naturally suited to computing accurate approximations of the following options. (i) A Bermudan call option. (ii) A Strathclyde call option, which has a payoff at expiry date T given by maxost≤r S(t)- minoster S(t). (iii) A Bonus call option, which has a payoff at expiry date 7 given by S(T) if S(T) ≥ E and E if S(T) < E. (b) Suppose 106 asset paths were used in a Monte Carlo method to approximate an option value, producing a confidence interval of width 10-1. Roughly how many asset paths would be needed to produce a confidence interval of width 10-3? (6,2 marks) (a) State whether or not the Binomial Method and the Monte Carlo method are naturally suited to computing accurate approximations of the following options. (i) A Bermudan call option. (ii) A Strathclyde call option, which has a payoff at expiry date T given by maxost≤r S(t)- minoster S(t). (iii) A Bonus call option, which has a payoff at expiry date 7 given by S(T) if S(T) ≥ E and E if S(T) < E. (b) Suppose 106 asset paths were used in a Monte Carlo method to approximate an option value, producing a confidence interval of width 10-1. Roughly how many asset paths would be needed to produce a confidence interval of width 10-3? (6,2 marks)

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Step 12 ai No the Binomial Method and the Monte Carlo method are not naturally suited t... View the full answer