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Sensitivity Analysis of Option Pricing: Impact of Volatility and Barrier Conditions
| Subject | Finance |
Course Work
- Produce about 10 selected numerical scenarios to illustrate the impact of varying volatility.
- Analyze whether the resulting profile makes sense and explain why.
- Ensure that a separate function is used to handle this sensitivity analysis task.
- Explain in your report any precautions taken to minimize noise in the sensitivity analysis.
- Determine what the option approximately becomes when B is much, much larger than S₀.
- Determine what the option becomes when B < S₀.
Do You Need Assignment of This Question
- Use your program to derive the probability that the payoff of the option exceeds $5, given the following numerical example:
- The underlying asset is a stock that pays no dividends.
- Spot price S₀ = 100$
- Volatility = 20%
- Time to maturity = 2 years
- Discount rate = 2%
- Barrier B = 150$
- Consider an approach or trick in implementing mainPricer that may reduce the computational/simulation effort compared to a brute-force approach.
- Discuss whether this pricing-efficient approach has any downsides when applied to sensitivity analysis.
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Answer
