Explain the programme of study of Monte Carlo method
Explain the programme of study of Monte Carlo method.
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Here is a programme of study for the Monte Carlo path-simulation methods.
• European calls, puts and binaries on a single equity: Simulate a single stock path, the payoff for an option, or still a portfolio of options, compute the expected payoff and current value to price the contract.
• Path-dependent option on a single equity: Price a barrier, lookback and Asian.
• Options on several stocks: Price a multi-asset contract by simulating related random walks. You’ll observe how time taken varies along with number of dimensions.
• Interest rate derivatives, spot rate model: It is not that much harder than equities. Only keep in mind to present value along each realized path of rates before taking the expectation across whole paths.
• HJM model: A little more ambitious is the HJM interest rate model. Utilize a single factor and then two factors.
• BGM model: This is discrete version of HJM.
Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends are expected to grow at a rate of 18% for the next three years and then a constant rate of 5% thereafter forever. What is the vlaue of its current stock price? Assuming that the discount rate is 10%.{Hint: pages 84-
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