Introducing the Brownian motion in the way of Einstein and Wiener we find the connection between a Wiener Process and the Heat Diffusion PDE.We solve the PDE analytically for some boundary conditions and then use the connection to the Wiener Process to solve more complex BVP's using Monte Carlo...

The least squares Monte Carlo method of Longstaff and Schwartz (2001) has become a standard numerical method for option pricing with many potential risk factors. An important choice in the method is the number of regressors to use and using too few or too many regressors leads to biased results....

Credit value adjustment (CVA) and related charges have emerged as important risk factors following the Global Financial Crisis. These charges depend on uncertain future values of underlying products, and are usually computed by Monte Carlo simulation. For products that cannot be valued...

In this paper we propose the optimum weighting scheme for pricing American options under a local volatility model. American options are priced under the constant elasticity of variance volatility model using Monte Carlo simulation. The residuals obtained from regression were heteroscedastic. For...

A common feature of financial time series is their strong persistence. Yet, long memory may just be the spurious effect of either structural breaks or slow switching regimes. So far, five testing procedures have been proposed to distinguish between true and spurious long memory. The tests are...

This paper demonstrates that it is possible to improve significantly on the estimated call prices obtained with the regression and simulation-based least-squares Monte Carlo method by using put-call symmetry. The results show that, for a large sample of options with characteristics of relevance...

We present the valuation of contracts that combine financial structured products and insurance policies - pure endowment insurance and risk insurance contracts. The embedded options in these products promise, upon exercise, the higher of either the future value of the invested fund in risk-free...

The structure of a typical rainfall insurance is complex; insurance payoffs are based on many parameters such as the rainfall volume, the rainfall distribution (the number of consecutive dry days), the number of days with excess rainfall etc. Such a complex insurance structure is essential to...

We consider a Heston type inflation model in combination with a Hull–White model for nominal and real interest rates, in which all the correlations can be non-zero. Due to the presence of the Heston dynamics our derived inflation model is able to capture the implied volatility skew/smile,...