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The question requires you to provide a method which uses uniform random variables and transforms them to generate realizations of the described asset values. To give a bit more general answer: this is solved by the inverse transform sampling method. The main idea is to obtain realizations of a random variable $x$ with any given distribution function $F(x)$, ...


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Say your asset can take the discrete values {1,2,3,4} with probabilities {0.4, 0.1, 0.2, 0.3}. The question is to derive a sampling procedure that returns either {1,2,3,4} with the right probabilities according to the underlying distribution. The solution is to use a random uniform variable ($u \sim U(0,1)$)and allocate it based on the following: if $u &...


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