Monte Carlo Flashcards

1
Q

Standard error of MC estimate of a RV

A

RMSE

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2
Q

Error of Euler scheme discretization method

A

O(delta*t) which means that the error disappears at the same spped of the decline in time increments

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3
Q

If underlying is assumed to follow Lognormal random walk. Is the discrete-time process exact?

A

Yes -> no approximation is needed -> if payoff is NOT path-dependent, it is sufficient to simulate only final price

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4
Q

Option is path-dependent and underlying follow lognormal random walk. Error?

A

Exact but still =(delta*t) error

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5
Q

Error if discretization is approximate

A

O(delta*t) AND O(N^-0.5) due to N being finite. The error in the price is then the max out of these two

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6
Q

Simplest way to calculate delta with MC

A

estimate options value twice, with S+h and S-h. Errot is then O(h^2). However: maginify error -> solve by using same values for random numbers

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7
Q

Simple way of calculating greeks for lognormal RW

A

multiply final value of S with (1+epsilon)

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8
Q

How to generate correlated RVs

A

Choleski factorization

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9
Q

Disadvantages of MC

A

1) Slow compared to analytical solution

2) American options difficult (must calculate price for ALL values of S and t)

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10
Q

Longstaff Schwartz

A

use regression on sample paths for american options

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