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Running head: OPTIONS ANALYSIS AND VALUATION
Options Analysis and Valuation
OPTIONS ANALYSIS AND VALUATION
The general outline of the algorithm used.
Set So=60,𝛿𝑡=1/10000,r=0.06,𝜎=0.033.Generate Si for i=1…..10000 by the following relation
THE STOCK’S VOLATILITY=3.33
Where ∅ is a standard normal random variate,a new one is taken at each step.
2. The above step is repeated N times so that we get N stock price realization vectors, each of the
length 252.We denote by Siji the ith day’s simulation in the jth realization.
3. For each price path, we calculate the average value given by the following formula;
Average=1/N∑10000I=0 Sji for j=1…N.
4. Calculate the payoff for each realization for both fixed and floating strike
FixedPayoffj=max (Averagej-E,0) (1)
5. Calculate the discounted average of each of the above values over j=1…. N
6. Calculate the standard error of the vector of the N simulated values.
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