Assume we are in the midst of the financial crisis in October 2008. Your firm is considering the purchase of a 10 year put option on the S&P 500 Index. You are analyzing the pricing of this option and you would like to incorporate dissimilar deterministic assumptions for the volatility, the interest rate and the dividend yield for each future year. Let us use the following notation:

 

A) Describe how you would use market data to estimate the future interest rates, future Index volatilities and dividend yields. Describe how to use Monte Carlo simulation to estimate the price of this option. Assume the initial index level is S0 and the strike
price is  K. Assume you are writing the instructions for a programmer  who wil implement the program.

B) Explain in detail an efficient variance reduction technique to improve the efficiency of the algorithm.  
 
C) Explain carefully how you could numerically estimate the delta of this put option.

 

Posted Date: 3/16/2013 2:30:59 AM | Location : United States

Ask an Expert

Related Discussions:- efficient variance reduction, Assignment Help, Ask Question on efficient variance reduction, Get Answer, Expert's Help, efficient variance reduction Discussions

Write discussion on efficient variance reduction
Your posts are moderated

Write your message here..

Related Questions

Major risk return decision areas, Q. Major Risk Return Decision Areas? ... Q. Major Risk Return Decision Areas? 1) Financial Analysis and Control: This area is concerned with the Financial Statements, i.e. Income Statement, Balance Sheet, Funds Flow S

Common size and index analysis, sk company had the following balance sheets... sk company had the following balance sheets and income statements over the last 3 years

Calculate the price of winnebago stock , Calculate the price of Winnebago s... Calculate the price of Winnebago stock (Winnebago has no debt so this is the market value of the firm seperated by the number of common shares outstanding.) from the cashflows you

Operating lease, what is operating lease, its features, advantages, its app... what is operating lease, its features, advantages, its applicability

Sources of finance, Classification of finance and abrief description of eac... Classification of finance and abrief description of each source of fund

Case study , MV METALWORKS MV METALWORKS

Compute the expected profit, A drug company has developed a new painkiller ... A drug company has developed a new painkiller for chronic pains, although it is doubtful whether the new drug actually has any effect. The company conducts a double-blind experimen

Statement of total comprehensive income for the year, At 31 July 2010 this ... At 31 July 2010 this instrument meets the definition of a derivative: Small or no initial investment. Its value is dependent on an underlying economic item; exchange ra

Determinants of the repo rate, Repo rates vary from transaction to tr... Repo rates vary from transaction to transaction. They depend upon a variety of factors like: Collateral's quality Repo term

Passive management, In the efficient markets, whether it is sec... In the efficient markets, whether it is security, equity or fixed-income markets it is believed that the investors use some type of passive strategy in