Problem bank

Problem 216 of 333MediumFinanceP216

How many Monte Carlo paths for a one-cent price?

  1. You price an at-the-money European call (S0=K=100S_0 = K = 100, r=5%r = 5\%, σ=20%\sigma = 20\%, T=1T = 1) by Monte Carlo. A pilot run of 10,000 paths gives a mean discounted payoff of 10.43 and a sample standard deviation of 14.7.

    (a) What is the standard error, and what is a 95% confidence interval for the price?

    (b) How many paths do you need for the 95% interval to have half-width one cent?

    (c) Using the discounted stock price as a control variate, the correlation between the payoff and the control is 0.925. How many paths do you need now?