Explain the programme of study of Monte Carlo method

Question

Explain the programme of study of Monte Carlo method.

Answer 1

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.