LadderMC {QFRM}

Ladder option valuation via Monte Carlo (MC) simulation.

Description

Calculates the price of a Ladder Option using 5000 Monte Carlo simulations. The helper function LadderCal() aims to calculate expected payout for each stock prices.

Important Assumptions: The option o follows a General Brownian Motion (BM) ds = mu * S * dt + sqrt(vol) * S * dW where dW ~ N(0,1). The value of mu (the expected price increase) is assumed to be o$r, the risk free rate of return.

Usage

LadderMC(o = OptPx(o = Opt(Style = "Ladder"), NSteps = 5), NPaths = 5,
  L = c(60, 80, 100))

Arguments

o

The OptPx Ladder option object to price.

NPaths

The number of simulation paths to use in calculating the price

L

A series of ladder strike price.

Value

The option o with the price in the field PxMC based on MC simulations and the ladder strike price L set by the users themselves

Author(s)

Huang Jiayao, Risk Management and Business Intelligence at Hong Kong University of Science and Technology, Exchange student at Rice University, Spring 2015

References

http://stackoverflow.com/questions/25946852/r-monte-carlo-simulation-price-path-converging-volatility-issue

Examples

(o = LadderMC())$PxMC #Price = ~12.30

 o = OptPx(o=Opt(Style='Ladder'), NSteps = 5)
 (o = LadderMC(o))$PxMC        #Price = ~11.50

 o = OptPx(Opt(Style='Ladder', Right='Put'))
 (o = LadderMC(o, NPaths = 5))$PxMC   # Price = ~12.36

 (o = LadderMC(L=c(55,65,75)))$PxMC   # Price = ~10.25