We could use Motne Carlo simulations to price a Eourpean call because 1-Black sc

Question

We could use Motne Carlo simulations to price a Eourpean call because 1-Black school Merton Model assumes that stock price followed normal distribution 2- BSM assume stock returns followed normal distributio 3-BSM assume exercise price followed normal distributio 4- BSM assume Dividend followed normal distributio 5- non above We could use Motne Carlo simulations to price a Eourpean call because 1-Black school Merton Model assumes that stock price followed normal distribution 2- BSM assume stock returns followed normal distributio 3-BSM assume exercise price followed normal distributio 4- BSM assume Dividend followed normal distributio 5- non above We could use Motne Carlo simulations to price a Eourpean call because 1-Black school Merton Model assumes that stock price followed normal distribution 2- BSM assume stock returns followed normal distributio 3-BSM assume exercise price followed normal distributio 4- BSM assume Dividend followed normal distributio 5- non above We could use Motne Carlo simulations to price a Eourpean call because 1-Black school Merton Model assumes that stock price followed normal distribution 2- BSM assume stock returns followed normal distributio 3-BSM assume exercise price followed normal distributio 4- BSM assume Dividend followed normal distributio 5- non above 1-Black school Merton Model assumes that stock price followed normal distribution 2- BSM assume stock returns followed normal distributio 3-BSM assume exercise price followed normal distributio 4- BSM assume Dividend followed normal distributio 5- non above

Explanation / Answer

Ans. 1 The asnwer is 1. Monte Carlo is basically simulation based model, where the values are taken of the option with different scenarios and then is run many times to generate ranges with probabilities for us to decide. This compare to a Black School model is better becuase in Black School model the underlying asset price or the movement follow a normal distribution. A normal distributionn or Lognormal Distribution is usually a bel shaped curve or it has a larger right side tail compared with a normal distribution.

So this enables the stock price to go from zero to infinity (non negative) which means that a stock price can fall upto 100% but can rise beyond 100%. This creates a biasness. In reality the curve may have flat right or left tail, which means that the market movement can impact on the returns of the stock drastically.

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