Monte Carlo Methods

Ingo Beyna
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Ingo Beyna: Centre for Practical Quantitative Finance

Chapter Chapter 5 in Interest Rate Derivatives, 2013, pp 47-71 from Springer

Abstract: Abstract Monte Carlo simulation is a robust numerical method to price plain-vanilla products as well as exotic interest rate derivatives. Due to the characteristics of the class of Cheyette models, the distribution of the state variables turns out to be normal with time dependent mean and variance. Therefore, we can apply exact simulation methods without any discretization error in time. Consequently, the results are precise and the simulation is fast. The efficiency can even be improved by using Quasi-Monte Carlo simulations. The pricing method is verified numerically for plain-vanilla and exotic interest rate derivatives in the Three Factor Exponential Model.

Keywords: Implied Volatility; Price Problem; Bond Price; European Option; Exercise Date (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-642-34925-6_5

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DOI: 10.1007/978-3-642-34925-6_5

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