Estimate the price of a European call option on a basket of four foreign currencies (FX),...

 

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Estimate the price of a European call option on a basket of four foreign currencies (FX), denoted in EUR/FX, by applying the Monte-Carlo simulation. Perform a Monte-Carlo study based on the correlated individual series of the spot rate movements, denoted as dSi = uiSi dt + Si ENi=1 Qij dzj, where ui denotes the drift of the i-th currency pair, defined as the difference between the domestic and the foreign currency rate. Use correlations obtained from historical FX spot rates for this part. Make assumptions. Estimate the price of a European call option on a basket of four foreign currencies (FX), denoted in EUR/FX, by applying the Monte-Carlo simulation. Perform a Monte-Carlo study based on the correlated individual series of the spot rate movements, denoted as dSi = uiSi dt + Si ENi=1 Qij dzj, where ui denotes the drift of the i-th currency pair, defined as the difference between the domestic and the foreign currency rate. Use correlations obtained from historical FX spot rates for this part. Make assumptions.

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