DEMOGRAPHIC DIVIDEND DEMOGRAPHIC DIVIDEND DEMOGRAPHIC DIVIDEND
Multi-asset options. Pricing model Ito lemma Continuous dividend case.
25
Multi-asset options
-
Upload
reese-cooksley -
Category
Documents
-
view
230 -
download
1
Transcript of Multi-asset options. Pricing model Ito lemma Continuous dividend case.
Monte-Carlo Simulation
Monte-Carlo simulation is based on the risk-neutral valuation result. The expected payoff in a risk-neutral world is calculated using a sampling procedure. It is then discounted at the risk-free interest rate.
1. Sample a random path for in a risk-neutral world.
2. Calculate the payoff from the derivative.
3. Repeat steps one and two to get many sample values of the payoff from the derivative in a risk-neutral world.
4. Calculate the mean of the sample payoffs to get an estimate of the expected payoff in a risk-neutral world.
5. Discount the expected payoff at the risk-free rate to get an estimate of the value of the derivative.