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10
votes
1answer
364 views

Consistency of economic scenarios in nested stochastics simulation

I am interested in references on research regarding the consistency of economic scenarios in nested stochastics for risk measurement. Background: Pricing by Monte-Carlo: For pricing complex ...
4
votes
0answers
89 views

Risk neutral measure in exponential levy model

Is there a method of finding a risk-neutral measure for assets driven by the levy process? I understand there is the esscher transform but I think it tends to transform the processes into ...
2
votes
0answers
178 views

Measure change in a bond option problem

This is not a homework or assignment exercise. I'm trying to evaluate $\displaystyle \ \ I := E_\beta \big[\frac{1}{\beta(T_0)} K \mathbf{1}_{\{B(T_0,T_1) > K\}}\big]$, where $\beta$ is the ...
1
vote
0answers
92 views

How to convert HJM model risk-neutral measure $\mathbb{Q}$ to real measure $\mathbb{P}$?

HJM model, $df(t,T) = \mu(t,T) dt + \xi (t, T)dW(t)$, is defined in risk-neutral measure $\mathbb{Q}$, according to Brigo's "Interest Rate Models" book. I wonder, how could I transform it to real ...
1
vote
0answers
99 views

What are the industry standard models for monte carlo simulation of basket options?

I would like to simulate an equity index, a risk free cash account and the yield curve for the purposes of valuing a guarantee on an insurance product that is being backed by both equities and cash. ...
1
vote
0answers
221 views

Pricing a Power Contract derivative security

I'm trying to price a "power contract" and would appreciate guidance on the next step. The payoff at time $T$ is $(S(T)/K)^\alpha$, where $K > 0$, $\alpha \in \mathbb{N}$, $T > 0$. $S$ is ...
0
votes
0answers
21 views

how best to equalize individual pair risk in a portfolio of stock pairs?

I am building a portfolio of stock pairs in which each pair is individually hedged via beta/hedge ratio adjustment. I am looking for a method to ensure that I am taking the same risk in each pair that ...
0
votes
0answers
35 views

What's the risk-neutral expectation of the arithmetic average of stock price?

All Black-Scholes assumptions apply ($y$ is yield): what's $E(A_T), E(A_T^2)$ and $Var(A_T)$ where $A_T=\frac{\int_0^T S_tdt}{T}$ is the continuous-sampling arithmetic average of the stock price ...
0
votes
0answers
12 views

Consumer (Borrowers and Lenders) risk free curve

I was thinking about this topic: how to construct a "risk free" curve for the generic consumer. Imagine we want to price a debt security done by a private, lended by another private (say, normal ...