Group Assignment 1 - Monte Carolo Option Pricing


Using either R or Python, replicate the analysis we did for the Monte Carlo Option pricing model when we priced European and Asian options. Use the same parameters from our Excel model so you can verify your code is working correctly. The goal of this assignment is to allow you to practice using simulation analysis in a programming language (which is where you're more likely to use it in practice as opposed to Crystal Ball in Excel). Specifcally, you will need to:

  1. Generate a random number from a uniform distribution.
  2. Map the random number into the stock price going up or down
  3. Simulate the stock price for 30 time periods
  4. Calculate the payoff of the call option
  5. Using a for loop, repeat the simulations 100,000 times
  6. Calcaulte the average payoff across the 100,000 simulations
  7. Discount the average payoff to time 0 to calculate the price of the option
  8. Plot the simulated price paths (time periods 0 to 30) for the first 1,000 simulations
  9. Plot a histogram of the stock price at time 30
  10. Plot a histogram of the payoff of the call option at time 30

After completeing the code, place your code and graphs in a Word document and submit it via Dropbox.