Monter Carlo and Finite Difference Methods in pricing financial derivatives.R

Java Python Project 1

Objectives

To lean writing effective and well-structured reports using clear persuasive explanations based on sound mathematical knowledge and techniques.

Requirements

•    Due: Monday week 7 (September the 9th), 10am (right before the lecture)

•    Late submission not accepted, except for an approved special consideration. If you are planning to apply for a special consideration or have an individual study plan, please, let your lecture know at least a week prior to the submission date.

If you have any other questions regarding the timing of presentation, please, contract your lecture at least two weeks prior to the presentation.

•    Do the project in groups, including numerical examples. However, reports should be written and submitted individually.

•    A written submission should be a PDF file. Font size 11-12pt. Please, adhere to the

university document requirements, as well as APA or similar for the report structure and references.

•    Title Page should have Title: Monter Carlo and Finite Difference Methods in pricing financial derivatives. As well as your group number and SID.

•    The document structure:

o  Title Page.

o Table of Contents.

o Introduction (executive briefing).

o Brief background on Monter Carlo and Finite Difference Methods, and it’s application to derivative pricing.

o Brief background on derivatives (options), and why this contracts are important for mordent financial system.

o Monte Carlo Method:

    Basic idea, why it works. Provide mathematical explanations.

    Efficiency, convergence, precision, etc.

    Optimisation of Monte Carlo methods.

    Terminal distribution and random paths. Provide mathematical explanations for these methods.

o Finance Difference Method

    Basic idea, efficiency, stability (for explicit scheme). Provide mathematical explanations.

    Possible variations, e.g. implicit scheme, Crank Nicolson method. Outline advantages, disadvantages and applicability.

o Comparison of Monte Carlo and Finite Difference methods.

    Comparison of advantages and disadvantages. Applicability in different cases.

o Numerical Examples (25%-45% of the report)

    Basic Monter Carlo and its variations.

    Explicit, implicit and Crank Nicolson schemes.

    Comparison of Monter Carlo and Monter Carlo methods.

    Use graphs and/or tables to compare results obtained by different

methods. Provide sufficient explanations wheneve Monter Carlo and Finite Difference Methods in pricing financial derivatives.R r applicable. Interpret numerical results and illustrate advantages/disadvantages of certain

methods in certain situations.

o Reference list, if applicable. Do not include references, if there is no citation. (Optional).

o Conclusion/Summary. Short summary of what has been done. Limitations, potential future research/improvements.

o Provide code in a separate file.

•    Focus should be on numerical methods. Financial models are secondary.

•    Target Reader: senior finance/commerce undergraduate with math major.

•    Long profs should not be included. Provide main ideas and use references, if required. Focus on the most important ideas/results.

Assessment criteria’s

•    Structure:              all required parts are present and completed. Well organised with logical flow of results.

•    Completeness:      include both Monter Carlo and Finite Differences.

•    Coherence:            results/statements should be mathematically correct, numerical solutions should be plausible.

•    Cleanness:            check gramma and consistency of notations. Formulas, graphs and

tables should be numbered. Correct references using APA-7 or similar

Referencing (sydney.edu.au)

•    Mathematical competency/novelty:

•    Write in a way that shows you indeed understand materials related to the subject.

•    Use any existing code from tutorial or other sources. Make sure that  the code is well commented in a way that it links to your submission.

Your code will be checked by tarnitin system for similarity.

Green 0~25%. Yellow 25%~50%. Orange 50%~75%. Red >75%.

If Orange – special attention will be paid with potential reporting to integrity team.

If Red – report to integrity team for potential plagiarism issue.

Presentation

•    Monday week 7, 9th  of September 2024 during a lecture. On-site by each group.

•    Submit presentation slides by Monday week 7, 10am. Power Point or PDF file. Also, have your presentation file on a flash drive as plan B.

•    Presentation duration 7 minutes for each group. Each group member should present for ~1 minute.

•    Possible questions from the audience and lecturer.

Assessment

Quality of slides and verbal presentation.

Completeness and coherence. Present important points. It’s not possible to cover everything.

Cleanness of slides.

Do not talk too fast.

Relevance.

Mathematical competency/novelty