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euro call by integration
4 messages · Dominykas Grigonis, Enrico Schumann, Krishna Kumar
On Sat, 13 Apr 2013, Dominykas Grigonis <dominykasgrigonis at gmail.com> writes:
Valuing european call option by taking expectation and integrating:
gmb <- function(x,s0=100,r=0.05,vol=0.1){
s0*exp( (r - vol^2/2) + vol * x)}
fun <- function(x, K=100){
(gbm(x) - 100) * dnorm(x)}
min = -(log(1) + (0.05-0.1^2/2)) / 0.1
integrate(fun,min,Inf)
could someone tell me what am I doing wrong? I do not even know if this is R related question or not...
returns 7.153855, while actual risk neutral price is 6.804958
Thank you in advance.
Kind regards,--
Dominykas Grigonis
I did not run your code, but shouldn't you discount the result?
Enrico Schumann Lucerne, Switzerland http://enricoschumann.net
You need to integrate payoff x density [disc factor x pmax(s-k,0) x density ] below Also the std error of the integration unlikely it is going to be that big but worth keeping in mind.
On Apr 13, 2013, at 7:42 AM, Enrico Schumann <es at enricoschumann.net> wrote:
On Sat, 13 Apr 2013, Dominykas Grigonis <dominykasgrigonis at gmail.com> writes:
Valuing european call option by taking expectation and integrating:
gmb <- function(x,s0=100,r=0.05,vol=0.1){
s0*exp( (r - vol^2/2) + vol * x)}
fun <- function(x, K=100){
(gbm(x) - 100) * dnorm(x)}
min = -(log(1) + (0.05-0.1^2/2)) / 0.1
integrate(fun,min,Inf)
could someone tell me what am I doing wrong? I do not even know if this is R related question or not...
returns 7.153855, while actual risk neutral price is 6.804958
Thank you in advance.
Kind regards,--
Dominykas Grigonis
I did not run your code, but shouldn't you discount the result? -- Enrico Schumann Lucerne, Switzerland http://enricoschumann.net
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