Problem bank
Problem 200 of 333HardStochastic CalculusP200
Importance sampling a rare coin event
You want by Monte Carlo. The true value is about , so plain simulation almost never sees the event. Instead you simulate with a coin that lands heads with probability .
(a) What weight must each simulated sequence carry so the estimator is unbiased? Write it in terms of the number of heads .
(b) Why does this work, and why is a sensible choice for the biased coin?
(c) Roughly how many samples does each method need for a 1% relative error?
See the hint and solution with a free account
Every problem on Quant Engine is free, with a hint and a full worked solution. Making an account takes 30 seconds and no card. Then you can see them and track what you have solved.