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Exotic Option Pricing using Monte Carlo Simulation
About the course
This course consists of an EXCEL file calculates option prices for a number of vanilla and exotic options using Monte Carlo Simulation as follows:
- Vanilla European Call and Put options are priced for model calibration and tweaking
- Out of Money Call and Put options are priced to compared cost savings between vanilla and exotic option contracts
- Asian Call and Put options that replace the terminal price with the average of prices across the simulated path,
- Look-back Call option are priced to simulate maximum pays
- Barrier or Sudden Death Call option which has both in and out barriers above and below the strike,
- Ladder Call option with two rungs (high water marks) in addition to the original strike, and
- Chooser options which allow the owner to choose between a 9-month call or put option three months down the line.
The methodology followed in the EXCEL file is:
- A Monte Carlo simulator is use to generate a path of monthly prices for a one year period. For the chooser option, the Black Scholes option pricing formula is used together with the simulated price of the 3rd month, to estimate the price of a 9-month call/ put option.
- An antithetic price series is also generated for each simulation to increase the speed of convergence
- Payoffs and discount values for each option are determined for both the regular and antithetic MC simulated prices
- Values (both regular and antithetic) are stored in a data table containing 500 simulated runs
- Average premiums across all runs are calculated for both regular and antithetic scenarios
- The average between the regular and antithetic average premiums is taken to arrive at the simulated price of the option
After taking this course you will be able to:
- Build a Monte Carlo simulator to generate a path of monthly prices
- Determine antithetic price series to increase the speed of convergence to results
- Calculate the price of vanilla European call and put options
- Calculate the price of out of money call and out options
- Calculate the price of Asian call and put options
- Calculate the price of look-back call option
- Calculate the price of barrier options
- Calculate the price of chooser options
The candidate should be familiar with basic derivative products and their pricing, having and understanding of Monte Carlo Simulation & be comfortable with basic mathematics, statistics, probability and EXCEL.
The course is aimed at professionals who deal with pricing, valuation and risk issues related to structured fixed income and foreign exchange transactions.