Please note: for the problems using data we are not interested in all the minor steps performed when analyzing the data. However, you should
Name:
For instructor’s use only
Problem | Points | Score |
A | 100 | |
B | 100 |
|
C | 100 | |
Bonus | 20 | |
Total | 300 |
The payoff of an arithmetic Asian call option is:
Its value may be computed using straight Monte Carlo simulations. However, in order to obtain a small standard error, the number of simulations must be very high. To solve this computationally extensive problem, we will use the payoff of a geometric Asian call option as the control variate:
The idea is to use the known analytic price of the geometric Asian and the distance between MC simulations to obtain an approximate for the analytical formula for the arithmetic Asian price.
In this problem we consider r = 3%, σ = 0.3, S0 = 100, and assume the goal
is to price an arithmetic Asian call option with strike K = 100 and maturity
T = 5.
We also assume the asset follows the standard log-normal/geometric Brow- nian motion model:
S(∆t) = S(0)e((µ− σ2 )∆t+(σ√∆t)s)
Pg = e−rT .S0eρT N (d1) − KN (d2)Σ
where:
such that σˆ is adjusted sigma and N is the total number of trading days
Use the above formula to price this geometric Asian call option.
(b)Implement a Monte Carlo scheme to price an arithmetic Asian call option (P sim). Use M = 1, 000, 000 simulations. Record the answer, a confidence intervaland the time it takes to obtain the
(c)Implement a Monte Carlo scheme to price a geometric Asian Call option (Psim).
(d)Using M = 10, 000 simulations and the same exact random variablescreate:
numbers Xi which are M replications for the arithmetic Asian Option price
numbers Yi which are M replication for the geometric Asian Option price