New answers tagged portfolio
The convention in the world of finance is that notionals are always nonnegative. In mathematical finance, notional could be real-valued, so let's call it MFNotional to distinguish. If MFnotional is negative, then it means short an option. Here is an example to indicate how I arrived at N1 = N/ΔK. Suppose K0 = 0.8, ΔK= 0.2, and N = 1m SGD. Then K2 = 0.8 ...
In what follows, I assume no default and no frictions. A perfect hedge for your short position in a binary call would be a long position in a digital call with the same notional, strike price, and maturity date. Your goal is to super-replicate the payoff from a long digital call by a static position with a pair of co-terminal vanilla calls, one with strike ...
A very simple approach could be the following: draw a random number for each day for each stock. If you refer to "average/mean" by return and to "standard deviation/variance" by volatility, you could use these for the distribution parameters of the random numbers per stock. If you dislike that values can go below zero, apply Euler's exponential function on ...
To each closure on this: I attribute the difference to Idzorek to rounding errors. And on a side node, Idzorek sets the sample variance equal to the prior variance, an issue that kept myself busy until I found that detail confirmed by Walters paper.
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