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Estimation of the Option Prime: Microsimulation of Backward Stochastic Differential Equations
Author(s) -
Allende Héctor,
Elías Carlos,
Torres Soledad
Publication year - 2004
Publication title -
international statistical review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.051
H-Index - 54
eISSN - 1751-5823
pISSN - 0306-7734
DOI - 10.1111/j.1751-5823.2004.tb00227.x
Subject(s) - stochastic differential equation , prime (order theory) , mathematics , order (exchange) , econometrics , computer science , mathematical optimization , economics , finance , combinatorics
Summary A mathematical statistical model is needed to obtain an option prime and create a hedging strategy. With formulas derived from stochastic differential equations, the primes for US Dollar/Chilean Pesos currency options using a prime calculator are obtained. Furthermore, a backward simulation of the option prime trajectory is used with a numerical method created for backward stochastic differential equations. The use of statistics in finance is highly important in order to develop complex products.