Answered step by step
Verified Expert Solution
Question
1 Approved Answer
3. (12 points) A stock is governed by a geometric Brownian motion with initial price of $60, an interest rate of 1%, a volatility of
3. (12 points) A stock is governed by a geometric Brownian motion with initial price of $60, an interest rate of 1%, a volatility of 40%. You monitor the stock price each week for twenty-six weeks ( one half of a year). Compute the price of a down-and-in put option with a strike price of $60 and a barrier of $55 with an absolute error of $0.01 using a) IID sampling, b) IID sampling with a control variate: the European call option, c) IID sampling with a control variate: the European put option, and d) Integration lattice sampling. Compare the performance of these three methods and attempt to explain intuitively why certain methods perform better than others
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started