/

Nematrian Reference Library

[this page | back links]

Set out below is information (held by the Nematrian website) on the reference you have selected

Abstract "This paper proposes a simulation-based approach which it primarily applies to the problem of identifying the fair (i.e. market consistent) valuation of books of derivatives. The proposed approach offers significant run-time improvements relative to more traditional simulation-based approaches when applied to this problem. It is particularly well-suited to derivative books that depend on a relatively small number of underlyings, including ones that in the banking, asset management or insurance worlds arise if customers are guaranteed that future fund-linked payouts will not fall below specified floors. The approach typically involves the preparation of a larger base simulation set (using traditional techniques usually alongside low order moment fitting variance reduction techniques) and creating from this base set a smaller collated simulation set with only the latter then applied to the payoffs being valued. Weights ascribed to the individual collated simulations may vary to optimise valuation accuracy, or they can default to equal weighting if there is no strong reason to diverge from this simpler variant. A refinement involves the valuation algorithm typically being segmented by reference to an indicator (in the example explored in the paper the adjusted ratio of the strike price to the price of the underlying) with different smaller collation sets being used depending on the range within which this indicator lies and/or with weights and values ascribed to different simulation points in the collated simulation set being selected to facilitate more accurate approximation of the payoff function. The paper concludes with an explanation of how the same approach can be applied to problems outside the derivative pricing (or even the broader financial) arena, including to engineering control process problems, if the underlying problem to be solved is amenable to simulation techniques and if run-time efficiency is desirable."

See here to choose a new Category/Sub-Category or here for a list of all references held by the Nematrian website. Please contact us if any of the above material is inaccurate or if there are references you think should be included that we have excluded or vice-versa.

---