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Questions tagged [monte-carlo]

Monte Carlo simulation methods are a broad class of computational algorithms that rely on repeated random sampling to obtain numerical results.

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44 views

Generate Random Variable Using Acceptance Rejection Method

I have a question about acceptance rejection method and really appreciate your advice: Suppose we want to generate random variable that has probability density function $f(x)$, since we're using ...
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Do daily returns from a distribution with skew and/or kurtosis lead to options implied volatility skew?

I've been trying to price a call option using a Monte Carlo approach with the specific goal of showing implied volatility skew. I'm using the sinh-arcsinh transformation to make the random numbers I ...
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53 views

Price Down and In Barrier Option Using Local Vol and Monte Carlo

As an entry level financial engineer, I'm trying to make sense of a practical case using the concepts I learned including local vol, monte carlo, so I really appreciate your advice if my understanding ...
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1answer
59 views

Formula for quantiles of swaprates in the 1-factor Hull-White model

Is there a closed formula to approximate the quantiles of swaprates in the 1-factor Hull White model? Background The Hull-White is a Gaussian model for the short rate. Its mean and covariance ...
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179 views

Monte Carlo option pricing with R

I am trying to implement a vanilla European option pricer with Monte Carlo using R. In the following there is my code for pricing an European plain vanilla call option on non dividend paying stock, ...
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1answer
217 views

Difference between cross-validation, backtesting, historical simulation, Monte Carlo simulation, bootstrap replication?

To determine if a strategy is better than others, or to optimize the parameters of a model, the following statistical techniques are often employed, often one over the others instead of altogether. ...
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482 views

Risk Neutral and Real World Valuations using Monte Carlo

Assume I'm an investor that wants to sell exotic put options. No one else is selling my kind of put option, so I need to determine my own "Market Price" through Monte Carlo simulation. I know that by ...
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113 views

Basic Monte Carlo Present value calculation in R question

I'm self studying monte carlo applications with the application towards present values. However the values that I am using are of the uniform distribution variety with a pre defined minimum and ...
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45 views

Are radial basis functions popular in least squares monte carlo option pricing?

In a Longstaff-Schwarz setting option on several underlyings can be priced using least squares monte carlo. Using suitable set of basis functions, continuation values can be approximated using ...
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63 views

What is the relevant application of mathematics?

I want to model an asset (like a currency) that is sensitive to relative economic performance between two countries, which can be measured by GDP (for example). This is a very simple case with many ...
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1answer
60 views

European Call option replication

An asset $S_t$ is evolving according to the Black-Scholes model. We want to replicate a call option on this asset by holding Delta units of the asset at every time. I use a Monte Carlo algorithm to ...
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41 views

Stratified sampling in asian options

I am using the procedure of stratified sampling for variance reduction. In the Glasserman book the algorithm for stratified the terminal value of the Brownian motion is given for european options. For ...
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75 views

Can variance change over time?

I'm working on a toy project that involves fantasy basketball, I know this is the quantitative finance stackexchange, but it seemed like the best place to ask this question. My goal is to make ...
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56 views

Optimizing monte carlo code in python [closed]

What are they key points to use while coding a monte carlo simulation in python? I have the following monte carlo code : ...
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70 views

When to remove a trading strategy?

Every strategy has a limited lifespan. How do you decide when to stop a particular strategy as it has lost its edge? Few of things that can be thought is strategy crossing its maximum drawdown, net ...
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1answer
138 views

Quasi Random Monte Carlo in m.v. portfolio optimization

Not specifying a correlation matrix for the Monte Carlo Simulation's random returns is equivalent to assuming no correlation or a correlation coefficient of zero, which will seriously and adversely ...
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2answers
147 views

theoretical reason for which we can use monte carlo simulation for option pricing

The classic way to price an option is solving either analitically or numerically the associated PDE subject to the terminal and boundary conditions. An alternative approach is to use monte carlo ...
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197 views

Monte Carlo (resampling) in m.v. portfolio optimization

The instability and high sensitivity of optimisation results can be augmented by adding another layer of quantitative methodology in the form of Monte Carlo Simulation. The name Monte Carlo alludes to ...
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1answer
90 views

What is the annualized realized volatility of simulated Brownian motion paths?

I saw this following question in an exam. Take a Brownian motion simulation with drift 5% and annualized volatility of 20% for a period of 1 year. Then the annualized realized volatility of the ...
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93 views

Single-step Monte Carlo in Excel

How do you simulate correctly using raw prices not returns? I have corresponding periods of earnings to Futures but the Excel call function =NORMINV(RAND(),mean,stdev) generates negative Futures ...
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EMTN with two barrier options and pricing by Monte Carlo method

I analyzing an EMTN (Euro Medium Term Note) for my Master's degree thesis, which uses 2 barrier options: a Down and In put, an Up and In put However, I only know how to do it for Knock-out options. ...
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1answer
62 views

Hindsight overhedge for pricing path dependent options

I understand how to use the longstaff schwartz method in Monte Carlo to compute the continuation value of path dependent options but someone recently mentioned another technique called "Hindsight ...
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1answer
377 views

Local Volatility with Monte Carlo Simulation

I am trying to implement a Monte Carlo Simulation using Local Volatility Model (Dupire’s Equation). I’m pretty sure I can build a very good LV surface, however, I do not know how to use it in the MC ...
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1answer
66 views

Control variate for pricing a best of assets option : $\mathop{{}\mathbb{E}}[ \max ( F^1_T,F^2_T, …,F^N_T )]$

I want to use Monte Carlo to price a best of assets derivative : $$\mathop{{}\mathbb{E}}[ \max ( F^1_T,F^2_T, ...,F^N_T )]$$ where the $F^i_T$ is the forward of the ith asset observed at expiry ...
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31 views

Monte Carlo Simulation with varying expected returns and volatilities

I have yearly CMAs which denote the 5-year forward looking returns and vols. These CMAs are updated every year. For example in 2004, the outlook for next 5 years is 11%, in 2005 the outlook is 10.8%. ...
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1answer
92 views

Simulation scheme for SABR beside the standard Euler discretization

QUESTION: Beside Euler Scheme, is there another more robust (and preferably easy to implement) way to simulate asset path with SABR dynamics? Simulation that will withstand even for high volatilities....
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133 views

Antithetic sampling Monte Carlo

In Peter Jaeckel, Monte Carlo in Finance book, I read the following sentence: Whenever the first realised moment of the underlying variate draws $\{z_i\}$ has a strong impact on the result of the ...
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1answer
55 views

Multi-factor vs Single-factor interest rate model for XVA / CCR

When calculating XVA or Counterparty Credit Risk (CCR), you can choose to simulate your interest rate with a Multi-factor interest rate model or a Single-factor interest rate model. What are the pros ...
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140 views

Least Squares Monte Carlo

Could you explain to me in words (no formulas) the concept of the Least Squares Monte Carlo method to price an American style option?
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34 views

Extreme Value Simulation from Copulas with Monte Carlo

I'm trying to simulate the tail values from a multivariate distribution using copulas. I'm using Vine Copula package of R to derive the suitable copula for my data and I generate random samples out of ...
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39 views

Solving the sde under the Bates Model

Can someone please help me to find a way to simulate or find an approximation for the sde? So far, I've come across some research papers that use the 'Markov Chain Monte Carlo' method. But are there ...
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57 views

Approximation of portfolio VaR (after mapping) when Delta and Gamma both equal zero

As titled, I am having trouble estimating the VaR of a portfolio mapped as a function of a single risk factor $S$, in the form : $$V(S) = S^3 - 30S^2 + 300S + 150$$ with current value $S = 10$. $S$...
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Longstaff Schwartz with future conditional coupons

I've implemented the L-S algorithm for a simple put option. I want to value a more complex derivative which has future conditional coupons which only occur if the option is in the money. How would I ...
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1answer
54 views

Multi-legged Swap pricing

can anyone guide me how to price a multi-legged swap and whether I need Monte Carlo / LMM based approach or if there is a closed form solution. Receive leg "Libor 3m +1%" Payment leg If Libor is ...
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43 views

Using Non-Risk Neutral (Risk Natural) Parameters to Price Options?

Please correct me if any of my following statements are false. My understanding as to why we use Risk Neutral Analysis is that it makes life easy, and ultimately, allows use to come to a closed form ...
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61 views

Accuracy of Euler Monte Carlo discretization without knowing exact solution?

By using Euler Monte Carlo discretization (for a Hull-White model) we simulate $$r(t+\Delta t)=r(t)+\lambda(\theta(t)-r(t))\Delta t+\eta\sqrt{\Delta t}Z$$ with $Z\sim N(0,1)$, $\lambda$, $\eta$ ...
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55 views

Generate scenarios of multiple related parameters

Assume I have three industry datasets: interest rates, inflation and unemployment. Data contains information of last ten years and it's monthly. Now, I would like to create N possible scenarios of ...
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47 views

How can I manually calculate the VAR of a call and put portfolio?

How would I solve the following question? Im unsure how to estimate the stock price using MCS.
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4answers
671 views

Python libraries for Monte Carlo simulations?

I am learning about monte carlo simulations and I have found many blogs explaining its implementation in python. Because its a widely known and an important technique for structuring asset prices. I ...
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1answer
133 views

Ho-Lee short rate model under the Heath-Jarrow-Morton framework

Under the Heath-Jarrow-Morton (HJM) framework the dynamics of the Ho-Lee short rate model are defined as following: $$dr(t)=\theta(t)dt+\sigma dW^{\mathbb{Q}}(t)$$ with $\mathbb{Q}$ the risk-neutral ...
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53 views

Multiple layer Monte Carlo Option pricing

I have simulated 10000 price paths from the SVCJ model under $\mathbb{Q}$ from $S_{t0}$ until $S_{tm}$ and have computed one discounted option price $C_t$. I want to compute the numerical simulated ...
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1answer
100 views

Why do we have to use in-the-money paths in LSMC, and how?

In Longstaff's original LSMC paper (Valuing American Options by Simulation: A Simple Least-Squares Approach, 2001 (link)), it is claimed that one should only use in-the-money paths for regression at ...
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2answers
665 views

Monte Carlo simulations in Python using quasi random standard normal numbers using sobol sequences gives erroneous values

I am trying to perform Monte Carlo Simulations using quasi random standard normal numbers. I understand that we can use sobol sequences to generate uniform numbers, and then use probability integral ...
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47 views

Using variance reduction on only some models

I am pricing options with some copula based models using Monte Carlo simulation. I was looking up some easily implementable variance reduction methods and decided on antithetic variates. However, ...
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237 views

Geometric Brownian Motion with Dividends

I am working on a problem and had a quick question. I understand that for Geometric Brownian Motion we use the formula: $$X_{t_n} = X_{t_{n-1}} + \mu X_{t_{n-1}} \Delta t + \sigma X_{t_{n-1}} \...
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1answer
326 views

Implied volatility in Monte Carlo models

Suppose I want to get the implied volatility for a given option, whose process does not generate a closed-form formula. In that framework, how is the IV calculated, given the fact that bisection ...
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1answer
308 views

Hull white model Monte Carlo simulation Zero Coupon Bond

I am trying to use Hull White Model to price a zero coupon bond by Monte Carlo Simulation. The basic idea is under this equation: Under Hull White Model, I want to generate every short rate (r) and ...
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1answer
594 views

Numerical simulation of Heston model

I am trying to simulate on Python random paths for a general asset price as described by the Heston model: \begin{equation} \begin{aligned} dS_t &= \mu S_t dt + \sqrt{\nu_t} S_t dW^S_t \\ d\nu_t &...
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137 views

Do correlated assets affect the price of a portfolio of derivatives?

I need to compute the value at risk of a given portfolio as an exercise for a class at university but I have trouble understanding how correlated assets affect the price of the portfolio. Could you ...
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126 views

How can I conduct a basic Monte carlo simulation on 2 stocks?

I have 2 stocks in my portfolio A and B.A is currently at 50 dollars and B at 40 dollars. Correlation between A and B is 0. Let us say I bought the stocks today at 50 and 40 dollars. If I wish to use ...