Pia Stene presenterar sitt examensarbete

Monte-Carlo based hedge methods
	
Abstract

In this master's thesis the 'hedge' Monte-Carlo method (HMC) will be
studied. HMC is a mathematical algorithm that prices financial
derivatives and simultaneously determines the optimal hedge by
minimizing the financial risk. HMC can price a great number of
contingent claims, however in this report the price and hedge of an
ordinary European call option (with the non-dividend-paying stock as the
underlying asset) will be investigated. The aim of the report is:
 to describe the theory behind HMC, to implement HMC numerically in
order to validate the same - i.e. examine the accuracy in the price and
hedge estimates obtained by the algorithm.

 Two different approaches of HMC has been developed, a 'plug-in' HMC and
a modified HMC. The numerical implementation of the 'plug-in' HMC showed
to be harder than expected, in the sense of hindrance in obtaining good
accuracy in the estimates. One decisive reason is due to the fact of
having great difficulties in finding well performing bandwidth
parameters. However, the actual time factor has also shown to cause
reproducing errors in the validation procedure. The modified HMC,
realized through the weighted, Monte-Carlo integration theory, showed to
be a better way to proceed.