# Tag Info

5

No offense but it will be much more complicated than what you think... I'm not even sure that you are familiar with risk-neutral pricing in the first place? I'll try to give you some clues. This security is called a basket option. On top of the multi-asset feature, there are non-trivial mechanisms embedded in the contract you mention: an auto-callable ...

2

Besides the code's problem, I highly recommend the Brownian Bridge correction method which can compensate the pricing error resulting from discretization of the continuous path.

2

The proof is fine. For example, $D(t)S(t)$ is a martingale and then \begin{align*} E\big(D(t)S(t)\big) = S(0). \end{align*} Regarding the function $C(1, T-T_0, K)$, it is the value, at time $T_0$, of the option payoff \begin{align*} \left(\frac{S(T)}{S(T_0)} - K \right)^+. \end{align*} Here, you can treat $\frac{S(T)}{S(T_0)}$ as the normalized value or ...

2

The classical and naïve procedure for generating Poisson Hypersphere samples is by acceptance rejection, which has complexity over $O(N^2)$ and is thus unfeasible for most practical usage with on-the-fly generation. This cost could be improved by space partitioning techniques at low dimensions, but at high ones afaik they become useless again with uniform ...

2

You are trying to write a program which solves the following pricing PDE (Black-Scholes assumed) $$\frac{\partial V}{\partial t}(t,S) + (r-q)S\frac{\partial V}{\partial S}(t,S) + \frac{1}{2}\sigma^2 S^2 \frac{\partial^2 V}{\partial S^2}(t,S) - rV(t,S) = 0$$ where $V_0:=V(0,S_0)$ is the target option premium. The terminal condition is that, at $t=T$ (...

1

You don't need any assumption about the distributional properties of $S_t$. What matters for the FTAP is the drift only. By definition, the risk neutral measure $Q$ is the measure, equivalent to the natural measure $P$ (*), under which the local rate of return (i.e. the instanteneous drift of the SDE of $S_t$ per unit of $S_t$) of "any" traded asset $S_t$ (...

1

Indeed parameters are selected so that the quoted option prices are as close as possible to the model option prices. Alternatively, quoted and model implied volatilities can be used instead of prices.The first category are those that minimize the error between quoted and model. The second category,are those that minimize the error between quoted and model ...

1

There are many things wrong with your code. I'll leave aside the manner in which it is implemented, but note that it is: (1) not Matlab friendly with all the for loops (you should vectorise), (2) the fact that you have splitted the case j==0 in the main loop is a poor coding practice. for i=1:n I=1; for j = 0:(m-1); Z(j+1)= randn (1 ,1); dW=sqrt (T/...

1

you can find from the CBOE paper above mentioned that the value is pretty much that of a strip of vanillas, weighted by 1/K^2. Typically if spx spot goes down, then realized vol increases. Together with the increase of realized vol, implied vol gets "re-evaluated" and typically marked higher with a steeper skew etc. the remark of the implied vol surface ...

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