2 research outputs found
Fractional smoothness and applications in finance
This overview article concerns the notion of fractional smoothness of random
variables of the form , where is a certain
diffusion process. We review the connection to the real interpolation theory,
give examples and applications of this concept. The applications in stochastic
finance mainly concern the analysis of discrete time hedging errors. We close
the review by indicating some further developments.Comment: Chapter of AMAMEF book. 20 pages
A Hedged Monte Carlo Approach to Real Option Pricing
In this work we are concerned with valuing optionalities associated to invest
or to delay investment in a project when the available information provided to
the manager comes from simulated data of cash flows under historical (or
subjective) measure in a possibly incomplete market. Our approach is suitable
also to incorporating subjective views from management or market experts and to
stochastic investment costs. It is based on the Hedged Monte Carlo strategy
proposed by Potters et al (2001) where options are priced simultaneously with
the determination of the corresponding hedging. The approach is particularly
well-suited to the evaluation of commodity related projects whereby the
availability of pricing formulae is very rare, the scenario simulations are
usually available only in the historical measure, and the cash flows can be
highly nonlinear functions of the prices.Comment: 25 pages, 14 figure