Advanced

Pricing and Hedging using Hedge Monte-Carlo Method

Eski, Arzu (2014) FMS820 20141
Mathematical Statistics
Abstract (Swedish)
In this master’s thesis The Hedge Monte-Carlo method (HMC) is
evaluated. The HMC method is used to price financial derivatives and
at the same time obtain optimal hedge portfolios. The optimal hedge is
of great importance as it enables risk management in option trading.
The advantage of this method is also that different types of options
with features like path-dependent and early exercise can be priced.
The evaluation is based on the quality of the price and hedge estimates
of European options. To further evaluate the performance of the
method the price process of the underlying asset followed initially a Geometric
Brownian Motion process (GBM) and then the Normal Inverse
Gaussian process (NIG). Several different scenarios are... (More)
In this master’s thesis The Hedge Monte-Carlo method (HMC) is
evaluated. The HMC method is used to price financial derivatives and
at the same time obtain optimal hedge portfolios. The optimal hedge is
of great importance as it enables risk management in option trading.
The advantage of this method is also that different types of options
with features like path-dependent and early exercise can be priced.
The evaluation is based on the quality of the price and hedge estimates
of European options. To further evaluate the performance of the
method the price process of the underlying asset followed initially a Geometric
Brownian Motion process (GBM) and then the Normal Inverse
Gaussian process (NIG). Several different scenarios are considered in
the evaluation of retrieving good prices and hedges, i.e. different times
to maturity, initial stock prices and variances. Results shows that the
method is very promising when considering the quality of the price and
as for the quality of the hedge good levels are obtained for GBM when
the option is in the money. A desirable feature as the probability of
exercise of an in the money option is very high. For options where the
underlying asset follows NIG acceptable levels on the hedging errors
were difficult to obtain. As the performance of the method is measured
on both good prices and good hedges, the NIG process isn’t as suitable
as the GBM process when the HMC method i used. (Less)
Please use this url to cite or link to this publication:
author
Eski, Arzu
supervisor
organization
course
FMS820 20141
year
type
H2 - Master's Degree (Two Years)
subject
language
English
id
4436890
date added to LUP
2014-05-09 13:28:29
date last changed
2014-05-09 13:28:29
@misc{4436890,
  abstract     = {In this master’s thesis The Hedge Monte-Carlo method (HMC) is
evaluated. The HMC method is used to price financial derivatives and
at the same time obtain optimal hedge portfolios. The optimal hedge is
of great importance as it enables risk management in option trading.
The advantage of this method is also that different types of options
with features like path-dependent and early exercise can be priced.
The evaluation is based on the quality of the price and hedge estimates
of European options. To further evaluate the performance of the
method the price process of the underlying asset followed initially a Geometric
Brownian Motion process (GBM) and then the Normal Inverse
Gaussian process (NIG). Several different scenarios are considered in
the evaluation of retrieving good prices and hedges, i.e. different times
to maturity, initial stock prices and variances. Results shows that the
method is very promising when considering the quality of the price and
as for the quality of the hedge good levels are obtained for GBM when
the option is in the money. A desirable feature as the probability of
exercise of an in the money option is very high. For options where the
underlying asset follows NIG acceptable levels on the hedging errors
were difficult to obtain. As the performance of the method is measured
on both good prices and good hedges, the NIG process isn’t as suitable
as the GBM process when the HMC method i used.},
  author       = {Eski, Arzu},
  language     = {eng},
  note         = {Student Paper},
  title        = {Pricing and Hedging using Hedge Monte-Carlo Method},
  year         = {2014},
}