efficient variance reduction, Financial Management

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:

1569_44.png

 

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







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
Related Questions
It is argued that VC & PE houses achieve superior returns through ruthlessly focussing management on short to medium term outcomes. In particular, parsimonious cash management is g

What are some of the primary advantages when a corporation has operations in countries other than its home country?  What are some of the risks? Foreign operations may decrease

Q. Explain about Temporary or Variable Working Capital ? Temporary or else Variable Working Capital - Any amount over and above the permanent level of working capital is called

Assume that you have just "run out of money" and are unable to move your "idea" from its development stage to production and the startup stage.  However, you remain convinced that

1. Collect three years of recent, financial data (2007 - current), including the Balance Sheet, Income Statement, and Statement of Cash Flow. a. REQUIRED - paper copies o

Explain Swap Dealer A swap dealer is a market maker of swaps and predicts a risk position in matching opposite sides of a swap and in making sure that every counterparty fulfil

Swap Market: The fall of Bretton Wood system in early 1970s weakened of the pound. It was imperative to stop the downward slide of the pound. In order to control the flow of fo

Treasury Inflation-Protected Securities (TIPS) are the inflation-indexed bonds, the US Treasury offers. The first offer was made in the year 1997. As the name sug

Write down what processes and data you would analyse when looking at the following scenarios and write down any improvements you could include to ensure that the problem would be l

Post-merger EPS and post-mergershare price An estimated post-merger EPS can be calculated by: (Combined earnings) / total shares after merger An estimated post-merger s