SIMULATING STOCK PRICES Sample Clauses

SIMULATING STOCK PRICES. Monte Carlo Simulation 1. Select a risk-neutral statistical model for the stock price. We will use the risk-neutral lognormal model. 2. Generate several simulated observations of the future stock price according to the model. 3. For each observation, calculate the payoff of the derivative.
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SIMULATING STOCK PRICES. Assume a stock has a current price of S 0 , and that we wish to generate N simulated prices for the stock at time T. Then we will generate N observations of Z ∼ Normal (0, 1) , denoted by z1 , z2 , ... , zn . For each observation of Z , we will set S = S 0 em + zi v . The value of m used depends whether we are using the true or risk-neutral model, as explained above.

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