Solution-Determine the value of the call at expiration

Determine the value of the call at expiration

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Reference no: EM131104985

Consider the linear SDE that represents the dynamics of a security price:
dSt = .01 Stdt + 0.5 StdWt
With S0 = 1 given.
Suppose a European call option with expiration T = 1 and strike K 1.5 is written on this security. Assume that the risk-free interest rate is 3%.

(a) Using your computer, generate 1hv normally distributed random variables with mean zero and variance √2.

(b) Obtain one simulated trajectory for the St. Choose ?t = .2.

(d) Now repeat the same experiment with five uniformly distributed random numbers with appropriate mean and variances.

(e) If we conducted the same experiment 1000 times would the calculated price differ significantly in two cases? Why?

(f) Can we combine the two Monte Carlo samples and calculate the option price using 2000 paths?

Reference no: EM131104985

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Determine the value of the call at expiration

Reference no: EM131104985

Reference no: EM131104985

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