Dimension Reduction Approach To Simulating Exotic Options In A Meixner Levy Market.docVIP

IAENG International Journal of Applied Mathematics, 39:4, IJAM_39_4_10 ______________________________________________________________________________________ Dimension Reduction Approach To Simulating Exotic Options In A Meixner Levy Market ? Junichi Imai and Ken Seng Tan? Abstract–In the past decade, quasi-Monte Carlo on the security. This follows from the assumption of no-arbitrage (see (2) in Section 2). (QMC) method has become an important numerical tool in computational ?nance. This is driven, in part, by the sophistication of the models and, in part, by the complexity of the derivative securities. In this pa- per, we consider an enhanced QMC method recently proposed by Imai and Tan (2009). This method is known as the generalized linear transformation (GLT) and it increases the e?ciency of QMC via dimen- sion reduction. GLT can be used to simulate gen- eral stochastic processes and hence has a much wider range of applications. By assuming that the dynam- ics of the underlying asset price follows an exponen- tial Meixner L′evy process and by resorting to some exotic options including average options and lookback options, we demonstrate the e?ectiveness and robust- ness of GLT and it substantially outperforms the stan- dard applications of QMC and Monte Carlo methods. 2. Increased complexity of the derivative securities 3. Increased sophistication on modeling the dynamics of the underlying stochastic processes. 4. Early ?nance applications of MC are mainly con- cerned with calculations related to the pricing of complex ?nancial instruments and the computation of related hedging parameters. More recently, MC methods are used extensively in risk management (such as calculation of credit risk and market risk and value at risk computations), solvency analysis, and etc. It follows from Point 1 that MC method lends itself nat- urally to this application since it involv