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Pricing Path Dependent Derivative Securities Using Monte Carlo Simulation And Intra Market Statistical Trading Model
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Book Synopsis Pricing Path-dependent Derivative Securities Using Monte Carlo Simulation and Intra-market Statistical Trading Model by : Sungjoo Lee
Download or read book Pricing Path-dependent Derivative Securities Using Monte Carlo Simulation and Intra-market Statistical Trading Model written by Sungjoo Lee and published by . This book was released on 2004 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis is composed of two parts. The first parts deals with a technique for pricing American-style contingent options. The second part details a statistical arbitrage model using statistical process control approaches. We propose a novel simulation approach for pricing American-style contingent claims. We develop an adaptive policy search algorithm for obtaining the optimal policy in exercising an American-style option. The option price is first obtained by estimating the optimal option exercising policy and then evaluating the option with the estimated policy through simulation. Both high-biased and low-biased estimators of the option price are obtained. We show that the proposed algorithm leads to convergence to the true optimal policy with probability one. This policy search algorithm requires little knowledge about the structure of the optimal policy and can be naturally implemented using parallel computing methods. As illustrative examples, computational results on pricing regular American options and American-Asian options are reported and they indicate that our algorithm is faster than certain alternative American option pricing algorithms reported in the literature. Secondly, we investigate arbitrage opportunities arising from continuous monitoring of the price difference of highly correlated assets. By differentiating between two assets, we can separate common macroeconomic factors that influence the asset price movements from an idiosyncratic condition that can be monitored very closely by itself. Since price movements are in line with macroeconomic conditions such as interest rates and economic cycles, we can easily see out of the normal behaviors on the price changes. We apply a statistical process control approach for monitoring time series with the serially correlated data. We use various variance estimators to set up and establish trading strategy thresholds.
Book Synopsis Monte Carlo Simulation and Finance by : Don L. McLeish
Download or read book Monte Carlo Simulation and Finance written by Don L. McLeish and published by John Wiley & Sons. This book was released on 2011-09-13 with total page 308 pages. Available in PDF, EPUB and Kindle. Book excerpt: Monte Carlo methods have been used for decades in physics, engineering, statistics, and other fields. Monte Carlo Simulation and Finance explains the nuts and bolts of this essential technique used to value derivatives and other securities. Author and educator Don McLeish examines this fundamental process, and discusses important issues, including specialized problems in finance that Monte Carlo and Quasi-Monte Carlo methods can help solve and the different ways Monte Carlo methods can be improved upon. This state-of-the-art book on Monte Carlo simulation methods is ideal for finance professionals and students. Order your copy today.
Book Synopsis Monte Carlo Methods in Financial Engineering by : Paul Glasserman
Download or read book Monte Carlo Methods in Financial Engineering written by Paul Glasserman and published by Springer Science & Business Media. This book was released on 2013-03-09 with total page 603 pages. Available in PDF, EPUB and Kindle. Book excerpt: From the reviews: "Paul Glasserman has written an astonishingly good book that bridges financial engineering and the Monte Carlo method. The book will appeal to graduate students, researchers, and most of all, practicing financial engineers [...] So often, financial engineering texts are very theoretical. This book is not." --Glyn Holton, Contingency Analysis
Book Synopsis Modeling Path Dependent Derivatives Using CUDA Parallel Platform by : Lance Sterle
Download or read book Modeling Path Dependent Derivatives Using CUDA Parallel Platform written by Lance Sterle and published by . This book was released on 2017 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: The pricing of derivative securities with path dependence is governed by stochastic differential equations which rarely have a closed-form, analytic solution. These complex derivatives can be valued used simulation methods known as Monte Carlo methods, which converge slowly and thus require significant computational cost. This thesis demonstrates how the use of the GPU (Graphics Process Unit) can drastically lower the computational cost of these methods. The Longstaff;-Schwartz Least Squares Monte Carlo Method is implemented to price American options, and suggestions are made for improving the efficiency of the algorithm. A model for valuing Guaranteed Lifetime Withdrawal Benefit (GLWB) options using Monte Carlo methods is also proposed and implemented in CUDA's parallel environment. Finally, the sensitivity of the GLWB option to various factors and the ramifications for insurance companies who sell this guarantee is discussed.
Book Synopsis Pricing Derivative Securities (2nd Edition) by : Thomas Wake Epps
Download or read book Pricing Derivative Securities (2nd Edition) written by Thomas Wake Epps and published by World Scientific Publishing Company. This book was released on 2007-06-04 with total page 644 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book presents techniques for valuing derivative securities at a level suitable for practitioners, students in doctoral programs in economics and finance, and those in masters-level programs in financial mathematics and computational finance. It provides the necessary mathematical tools from analysis, probability theory, the theory of stochastic processes, and stochastic calculus, making extensive use of examples. It also covers pricing theory, with emphasis on martingale methods. The chapters are organized around the assumptions made about the dynamics of underlying price processes. Readers begin with simple, discrete-time models that require little mathematical sophistication, proceed to the basic Black-Scholes theory, and then advance to continuous-time models with multiple risk sources. The second edition takes account of the major developments in the field since 2000. New topics include the use of simulation to price American-style derivatives, a new one-step approach to pricing options by inverting characteristic functions, and models that allow jumps in volatility and Markov-driven changes in regime. The new chapter on interest-rate derivatives includes extensive coverage of the LIBOR market model and an introduction to the modeling of credit risk. As a supplement to the text, the book contains an accompanying CD-ROM with user-friendly FORTRAN, C++, and VBA program components.
Book Synopsis Monte Carlo Methods for American Option Pricing by : Alberto Barola
Download or read book Monte Carlo Methods for American Option Pricing written by Alberto Barola and published by LAP Lambert Academic Publishing. This book was released on 2014-05-21 with total page 160 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Monte Carlo approach has proved to be a valuable and flexible computational tool in modern finance. A number of Monte Carlo simulation-based methods have been developed within the past years to address the American option pricing problem. The aim of this book is to present and analyze three famous simulation algorithms for pricing American style derivatives: the stochastic tree; the stochastic mesh and the least squares method (LSM). The author first presents the mathematical descriptions underlying these numerical methods. Then the selected algorithms are tested on a common set of problems in order to assess the strengths and weaknesses of each approach as a function of the problem characteristics. The results are compared and discussed on the basis of estimates precision and computation time. Overall the simulation framework seems to work considerably well in valuing American style derivative securities. When multi-dimensional problems are considered, simulation based methods seem to be the best solution to estimate prices since the general numerical procedures of finite difference and binomial trees become impractical in these specific situations.
Book Synopsis Applications of Monte Carlo Simulation in Derivative Securities Pricing by : Rongwen Wu
Download or read book Applications of Monte Carlo Simulation in Derivative Securities Pricing written by Rongwen Wu and published by . This book was released on 2002 with total page 248 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Quantitative Modeling of Derivative Securities by : Peter Laurence
Download or read book Quantitative Modeling of Derivative Securities written by Peter Laurence and published by CRC Press. This book was released on 2017-11-22 with total page 335 pages. Available in PDF, EPUB and Kindle. Book excerpt: Quantitative Modeling of Derivative Securities demonstrates how to take the basic ideas of arbitrage theory and apply them - in a very concrete way - to the design and analysis of financial products. Based primarily (but not exclusively) on the analysis of derivatives, the book emphasizes relative-value and hedging ideas applied to different financial instruments. Using a ""financial engineering approach,"" the theory is developed progressively, focusing on specific aspects of pricing and hedging and with problems that the technical analyst or trader has to consider in practice. More than just an introductory text, the reader who has mastered the contents of this one book will have breached the gap separating the novice from the technical and research literature.
Book Synopsis Quantitative Modeling of Derivative Securities by : Marco Avellaneda
Download or read book Quantitative Modeling of Derivative Securities written by Marco Avellaneda and published by Routledge. This book was released on 2017-11-22 with total page 338 pages. Available in PDF, EPUB and Kindle. Book excerpt: Quantitative Modeling of Derivative Securities demonstrates how to take the basic ideas of arbitrage theory and apply them - in a very concrete way - to the design and analysis of financial products. Based primarily (but not exclusively) on the analysis of derivatives, the book emphasizes relative-value and hedging ideas applied to different financial instruments. Using a ""financial engineering approach,"" the theory is developed progressively, focusing on specific aspects of pricing and hedging and with problems that the technical analyst or trader has to consider in practice. More than just an introductory text, the reader who has mastered the contents of this one book will have breached the gap separating the novice from the technical and research literature.
Book Synopsis Quantitative Analysis, Derivatives Modeling, And Trading Strategies: In The Presence Of Counterparty Credit Risk For The Fixed-income Market by : Bin Li
Download or read book Quantitative Analysis, Derivatives Modeling, And Trading Strategies: In The Presence Of Counterparty Credit Risk For The Fixed-income Market written by Bin Li and published by World Scientific. This book was released on 2007-01-23 with total page 523 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book addresses selected practical applications and recent developments in the areas of quantitative financial modeling in derivatives instruments, some of which are from the authors' own research and practice. It is written from the viewpoint of financial engineers or practitioners, and, as such, it puts more emphasis on the practical applications of financial mathematics in the real market than the mathematics itself with precise (and tedious) technical conditions. It attempts to combine economic insights with mathematics and modeling so as to help the reader to develop intuitions.Among the modeling and the numerical techniques presented are the practical applications of the martingale theories, such as martingale model factory and martingale resampling and interpolation. In addition, the book addresses the counterparty credit risk modeling, pricing, and arbitraging strategies from the perspective of a front office functionality and a revenue center (rather than merely a risk management functionality), which are relatively recent developments and are of increasing importance. It also discusses various trading structuring strategies and touches upon some popular credit/IR/FX hybrid products, such as PRDC, TARN, Snowballs, Snowbears, CCDS, and credit extinguishers.While the primary scope of this book is the fixed-income market (with further focus on the interest rate market), many of the methodologies presented also apply to other financial markets, such as the credit, equity, foreign exchange, and commodity markets.
Book Synopsis Handbook in Monte Carlo Simulation by : Paolo Brandimarte
Download or read book Handbook in Monte Carlo Simulation written by Paolo Brandimarte and published by Wiley. This book was released on 2014-04-25 with total page 688 pages. Available in PDF, EPUB and Kindle. Book excerpt: An accessible treatment of Monte Carlo methods, techniques, and applications in the field of finance and economics Providing readers with an in-depth and comprehensive guide, the Handbook in Monte Carlo Simulation: Applications in Financial Engineering, Risk Management, and Economics presents a timely account of the applicationsof Monte Carlo methods in financial engineering and economics. Written by an international leading expert in thefield, the handbook illustrates the challenges confronting present-day financial practitioners and provides various applicationsof Monte Carlo techniques to answer these issues. The book is organized into five parts: introduction andmotivation; input analysis, modeling, and estimation; random variate and sample path generation; output analysisand variance reduction; and applications ranging from option pricing and risk management to optimization. The Handbook in Monte Carlo Simulation features: An introductory section for basic material on stochastic modeling and estimation aimed at readers who may need a summary or review of the essentials Carefully crafted examples in order to spot potential pitfalls and drawbacks of each approach An accessible treatment of advanced topics such as low-discrepancy sequences, stochastic optimization, dynamic programming, risk measures, and Markov chain Monte Carlo methods Numerous pieces of R code used to illustrate fundamental ideas in concrete terms and encourage experimentation The Handbook in Monte Carlo Simulation: Applications in Financial Engineering, Risk Management, and Economics is a complete reference for practitioners in the fields of finance, business, applied statistics, econometrics, and engineering, as well as a supplement for MBA and graduate-level courses on Monte Carlo methods and simulation.
Book Synopsis Streamlining Monte Carlo Simulation with the Quasi-Analytic Method by : N.K. Chidambaran
Download or read book Streamlining Monte Carlo Simulation with the Quasi-Analytic Method written by N.K. Chidambaran and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Trading strategies and contingent claims with path-dependent returns are difficult to model analytically. Monte Carlo simulation, the standard solution technique, is computationally expensive and provides a solution only for the specific parameter values used in the simulation. We present an alternative quot;quasi-analyticquot; procedure that combines the power and flexibility of the simulation approach with the computational efficiency of an analytical solution. Our method uses simulation results to construct an analytic function that provides an approximate mapping from the input parameters to the returns distribution function. This analytic function can then be used to estimate the returns distribution for other parameter values directly without further simulation. We illustrate the approach by analyzing the performance of a path-dependent long-term protective put strategy that requires rolling over a series of short-term options. The returns to the strategy depend on the investor's choice of put strike and rollover policy. We use our method to examine a risk-averse investor's optimal trading strategy, a problem that is time-consuming using standard Monte Carlo simulation. In one example, the simulation approach takes more than forty-five minutes to solve for just one particular volatility scenario, while our method provides the answer in a matter of seconds.
Book Synopsis Pricing American Options Using Monte Carlo Simulation by : Victoria Zhanna Averbukh
Download or read book Pricing American Options Using Monte Carlo Simulation written by Victoria Zhanna Averbukh and published by . This book was released on 1997 with total page 138 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Monte Carlo Estimation of American Call Options on the Maximum of Several Stocks by : Steven B. Raymar
Download or read book Monte Carlo Estimation of American Call Options on the Maximum of Several Stocks written by Steven B. Raymar and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Among numerical methods for valuing derivatives, lattice- based models like the binomial are useful for pricing American options, but have difficulty with path dependent contracts. Monte Carlo simulation is good for path- dependent problems, but has trouble with American early exercise. And for all methods, computation time increases sharply when there is more than one stochastic variable. Yet derivative instruments with all of these difficult features are being created daily, an example is an American option on the maximum of several stock prices. In this article, Raymar and Zwecher present an enhanced Monte Carlo technique designed to handle these problems. Their method is fast and accurate in basic cases and can be used easily on much more complex options, like a call on the maximum of ten stocks. The biggest problem in assessing its performance on the most difficult cases is that there are no benchmarks available for accuracy; the Raymar and Zwecher technique solves valuation problems that no other approach can touch.
Download or read book Monte Carlo Methods written by Roman Frey and published by . This book was released on 2009-10 with total page 136 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides an extensive treatment of the entire Monte Carlo simulation theory. Furthermore, the Monte Carlo technique is used for addressing the pricing of various interest rate derivatives in different term structure models by the simulation approach. With the rising complexity and diversity of upcoming derivative securities, analytically tractable or closed-form pricing methods are difficult to find or even inexistent. If the thoroughly popular lattice valuation approach additionally fails due to non-recombining characteristics, Monte Carlo simulation represents a powerful and flexible alternative pricing method. The goal of this paper is to discuss and implement the fundamentals of Monte Carlo methods and to introduce the wide use of this approach in finance, especially in interest rate derivative valuation. The paper is roughly divided into three parts. The first part focuses on random number generation and on increasing efficiency methods for Monte Carlo, such as variance reduction techniques or low-discrepancy sequences. In the following part different term structure models are developed and the link to the simulation theory is eventually established. In the third and final part some ordinary and extended Monte Carlo algorithms are implemented and corresponding simulations are run in order to analyze Bermudan swaption prices in detail. Even though Monte Carlo methods feature a relatively slow but given convergence rate, they remain a competitive tool in financial applications. They owe their rising popularity to a large extent to their flexibility and to recent progress in methods which improve their accuracy and precision in estimating quantities of interest. Moreover, some of the leading yield curve models are heavily relying on Monte Carlo techniques. Several extensions of the standard Monte Carlo approach, such as least-squares Monte Carlo, for instance, are able to overcome the early-exercise hurdle a.
Book Synopsis Convergence Studies on Monte Carlo Methods for Pricing Mortgage-Backed Securities by : Tao Pang
Download or read book Convergence Studies on Monte Carlo Methods for Pricing Mortgage-Backed Securities written by Tao Pang and published by . This book was released on 2016 with total page 15 pages. Available in PDF, EPUB and Kindle. Book excerpt: Monte Carlo methods are widely-used simulation tools for market practitioners from trading to risk management. When pricing complex instruments, like mortgage-backed securities (MBS), strong path-dependency and high dimensionality make the Monte Carlo method the most suitable, if not the only, numerical method. In practice, while simulation processes in option-adjusted valuation can be relatively easy to implement, it is a well-known challenge that the convergence and the desired accuracy can only be achieved at the cost of lengthy computational times. In this paper, we study the convergence of Monte Carlo methods in calculating the option-adjusted spread (OAS), effective duration (DUR) and effective convexity (CNVX) of MBS instruments. We further define two new concepts, absolute convergence and relative convergence, and show that while the convergence of OAS requires thousands of simulation paths (absolute convergence), only hundreds of paths may be needed to obtain the desired accuracy for effective duration and effective convexity (relative convergence). These results suggest that practitioners can reduce the computational time substantially without sacrificing simulation accuracy.
Book Synopsis Hedged Monte-Carlo by : Marc Potters
Download or read book Hedged Monte-Carlo written by Marc Potters and published by . This book was released on 2000 with total page 11 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new 'hedged' Monte-Carlo (HMC) method to price financial derivatives, which allows to determine simultaneously the optimal hedge. The inclusion of the optimal hedging strategy allows one to reduce the financial risk associated with option trading, and for the very same reason reduces considerably the variance of our HMC scheme as compared to previous methods. The explicit accounting of the hedging cost naturally converts the objective probability into the 'risk-neutral' one. This allows a consistent use of purely historical time series to price derivatives and obtain their residual risk. The method can be used to price a large class of exotic options, including those with path dependent and early exercise features.
