ZERO-COST COLLAR STRATEGY FOR CHILEAN EXPORTERS: BLACK-SCHOLES VALUATION VS MONTE CARLO SIMULATIONS, ESTRATEGIA COLLAR COSTO CERO PARA EXPORTADORES CHILENOS. VALUACION DE BLACK-SCHOLES VS SIMULACIONES DE MONTECARLO

Eduardo Sandoval and Paula Urrutia

Revista Internacional Administracion & Finanzas, 2014, vol. 7, issue 5, 25-40

Abstract: Monte Carlo Simulation (MCS) is an important technique used in finance to value European options in general and hedging strategies of exchange rate risk in particular. However, Hull (2012) indicates that this technique demands much computing time to achieve a high level of precision. In spite of the above, this article shows that the standard errors associated with MCS can be significantly reduced by increasing the number of random walks. Additionally, it is shown that the valuation of zero-cost collar strategy followed by a Chilean exporter, who seeks monthly coverage against foreign exchange risk, converges at the same price either using the Black-Scholes model or MCS when the number of random walks increases through simulations. Finally, the effectiveness of zero-cost collar strategy is evaluated. This strategy shows clear economic benefits associated of being implemented in periods of appreciation of the Chilean peso against the U.S. dollar.

Keywords: Zero-cost Collar Strategy; Black-Scholes Valuation; Monte Carlo Simulations (search for similar items in EconPapers)
JEL-codes: G13 G17 (search for similar items in EconPapers)
Date: 2014
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