Monte Carlo Valuation: The following are drawn from a uniform distribution on [0
ID: 2984476 • Letter: M
Question
Monte Carlo Valuation: The following are drawn from a uniform distribution on [0,1) using excel's Rand() function. The three sequences of numbers are to model the random walk of a stock that has initial price S0=100 and pays dividends at a rate of 2% and has volatility of 45%. The time between walk steps is 0.1 years, so that the last step to t=0.5 years. Assume risk free intert rate is 6%.
Walk 1: 0.748702394, 0.304860204, 0.613206568, 0.162237768
Walk 2: 0.291127509, 0.383682799, 0.777238413, 0.453580667
Walk 3: 0.498758386, 0.061670588, 0.278398573, 0.144097301
A. Determine the payoff for a down-and-out, at the money (K=S0) put option with barrier $75 for walks 1 and 3
B. Determine the Monte Carlo Valuation from the simulation for a Geometric Average Strike Asian Put Option with duration 1/2 year.
C. Determine the Monte Carlo Valuation from the simulation for an Arithmetic Strike Asian Put Option with duration 1/2 year.
D. Assume geometric and arithmetic average Asian options are highly correlated. If the "true" price of a Geometric Average Strike Asian Put is $7.59 use the Control Variate method to adjust the Average Option of part B.
Please show all work.
Explanation / Answer
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