QFRM (version 1.0.1)

VarianceSwapMC: VarianceSwap option valuation via Monte Carlo (MC) simulation.

Description

Calculates the price of a VarianceSwap Option using 500 Monte Carlo simulations. Important Assumptions: The option o followes a General Brownian Motion $ds = mu * S * dt + sqrt(vol) * S * dW$ where $dW ~ N(0,1)$. The value of $mu$ (the expected price increase) is assumed to be o$r-o$q.

Usage

VarianceSwapMC(o = OptPx(o = Opt(Style = "VarianceSwap")), var = 0.2, NPaths = 5)

Arguments

o

The OptPx Variance Swap option to price.

var

The variance strike level

NPaths

The number of simulation paths to use in calculating the price,

Value

The option o with the price in the field PxMC based on MC simulations and the Variance Swap option properties set by the users themselves

References

Hull, J.C., Options, Futures and Other Derivatives, 9ed, 2014. Prentice Hall. ISBN 978-0-13-345631-8, http://www-2.rotman.utoronto.ca/~hull/ofod. http://stackoverflow.com/questions/25946852/r-monte-carlo-simulation-price-path-converging-volatility-issue

Examples

(o = VarianceSwapMC())$PxMC #Price = ~0.0245

 (o = VarianceSwapMC(NPaths = 5))$PxMC # Price = ~0.0245

 (o = VarianceSwapMC(var=0.4))$PxMC # Price = ~-0.1565