Define term pricing derivatives in Monte Carlo simulation
Define the term pricing derivatives in Monte Carlo simulations.
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Pricing derivatives: The results of risk-neutral pricing which in the popular derivatives theories the value of an option can be computed as the present value of the expected payoff in a risk-neutral random walk. And computing expectations for a single contract is just a simple illustration of the above-mentioned portfolio analysis, although just for a single option and using the risk-neutral in place of the real random walk. Even if the pricing models can frequently be written as deterministic partial differential equations that they can be solved in a probabilistic manner, just as Stanislaw Ulam noted for another, non-financial, problems. Such pricing methodology for derivatives was first given by the actuarially trained Phelim Boyle in 1977.Whether you utilize Monte Carlo for probabilistic or deterministic problems the method is generally quite simple to
implement in fundamental form and therefore is extremely popular in practice.
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