Option..

naresh.thkr
Good Student
Posts: 25
Joined: Sat Aug 11, 2012 7:02 pm

Option..

Postby naresh.thkr » Wed Nov 14, 2012 12:16 pm

A path-dependent option is priced with a variable-node trinomial lattice. What should be done to reduce computational time without losing too much precision?
Choose one answer.
a. Set the model to binomial.
b. Use same-length time intervals.
c. Trim the tree of extreme prices with low probability of occurring.
d. Reduce the number of steps.
The correct answer is: Trim the tree of extreme prices with low probability of occurring.

The other solutions either change the intent of the model, do not help, or only help computationally when you also lose too much precision.

Can any one explain the answer as i did not get the explanation.

Tags:

balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Re: Option..

Postby balajismz » Wed Nov 14, 2012 12:28 pm

Firstly path dependent options or Asian Options are not covered in Part 1 of FRM, Secondly you could still solve this using Monte Carlo readings

As per the reading, option 4 is one of the ways to increase the speed of a simulation.

Balaji


Return to “CFA Level I”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.