Probabilistic modelling approach in Quantitative Finance
Explain the Probabilistic modelling approach in Quantitative Finance.
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Probabilistic: One of the main assumptions about the financial markets, at least so far as quantitative finance goes; those asset prices are random. We tend to think of explaining financial variables as following several random paths, along with parameters explaining the growth of the asset and degree of asset of randomness.
We efficiently model the asset path via a given rate of growth, on average and its deviation from such average. It approach to modelling has had the greatest influence over the last 30 years, leading to the explosive development of the derivatives markets.
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In May 1995, Japan Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds while the exchange rate was 80 yen per dollar. The company liquidated the investment one year afterwards for $10,650,000. The exchange rate turned out 110 yen per dollar
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Mr. James K. Silber, an avid international investor, only sold a share of Rhone-Poulenc, a French firm, for FF50. The share was bought for FF42 year ago. Now the exchange rate is FF5.80 per U.S. dollar and was FF6.65 per dollar a year ago. Mr. Silber attained
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