Risk Neutral - Monte Carlo
Overview
ito simulations
Risk Free
In addition to the assets being simulated as above, a risk free rate is typically specified.
Correlated Asset Prices
The generic monte carlo framework for risk neutral pricing simulates a number of assets, each of which follows a
geometric brownian motion, but with the brownian motions being correlated by some correlation matrix.
{% dX(t,W(t)) = u(t) dt + \sigma(t) dW(t) %}
In a risk neutral simulation, the drift term of each asset must equal the risk free rate. It is important to
set the risk free in consideration of the number of steps being generated.
Derivative Value Function
function value(assets){
}
Calculating the Derivative Value
