EUROPEAN STYLE EXOTIC OPTIONS VALAUTION USING MONTE-CARLO SIMULATION

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1. Log into your account or if you are a new user, register your account and enable two factor authentication.
2. Click on the [Exotic options] button, this will take you to the Dynamic-text-blocks parameters page.

Dynamic text-blocks parameters page

1. Select the exotic option strategy to be valued from the following list:
   1. Risk-neutral-world correlated share prices generation.
   2. Rainbow option
   3. Exchange-option
   4. Cash-or-nothing binary call option
   5. Cash-or-nothing binary put option
   6. Asset-or-nothing binary call option
   7. Asset-or-nothing binary put option
2. The latter five options can also be valued using their respective analytic formulae and are included here mainly for model-accuracy-check by comparing model results with their analytic equivalents. The raibow option is probably the most important here and is in general a super-set of the other options. Its general formulation is as follows: If S(1), S(2), S(3), ...., S(n) are share prices for n variables and K is the strike price, the expiry period pay-off from the Rainbow option is MAX[a(1)*S(1)^(p(1)) + a(2)*S(2)^(p(2)) + a(3)*S(3)^(p(3)) + ... + a(n)*S(n)^(p(n)) - K,0], where MAX[V,0] is the maximum of V and zero. a(i) is the coefficient parameter for share variable S(i) and p(i) is its power parameter. This formulation enables the rainbow option to easily be customised to price a variety of European-style basket-options. This is the reason why a(i)'s and p(i)'s are collectively referred to as basket parameters. As an example, an exchange option can easily be valued as a raibow option with two underlying share variables S(1) and S(2), and a(1) = 1, a(2) = -1, p(1) = 1, p(2) = 1, and K=0.
3. Select to enter pairwise-flat or pairwise-varying correlations between underlying share price variables.
4. Click the submit button. Depending on the chosen option strategy you will be taken to either the array-populating-parameters page or array-populating page.

Array populating parameters page

1. You will be directed to this page if your chosen strategy requires you to enter the number of underlying share variables, that is, it is not internally chosen for you by the system.
2. Select the number of underlying share variables.
3. Click the submit button, and this will take you to the Array populating page.

Array populating page

1. Identifier indices used in this section start identification counting from 0 to make them consistent with programming of array indices.
2. Enter the projection period or option expiry period in days.
3. Enter names of indicated underlying share price variables.
4. Enter number of discrete dividends before share price projection time (enter zero if none) of indicated underlying share variable. Discrete dividend is such that, if the underlying share price value just before dividend payment is S, and the value of discrete dividend is D, then the value of the share price just after discrete dividend payment is S-D.
5. Enter the number of known dividend yields before share price projection time (enter zero if none) of indicated underlying share variable. Known dividend yield is such that, if the underlying share price value just before dividend payment is S, and the value of known dividend yield is q, then the value of the share price just after dividend payment is S*(1-q).
6. Enter the coefficient parameters of indicated underlying share price variables.
7. Enter the power parameters of indicated underlying share price variables.
8. Enter pairwise correlations between indicated underlying share price variables.
9. Click the submit button, and this will take you to the Exotic options valuation parameters page.

Exotic options valuation parameters page

1. Enter the currency of valuation.
2. Enter the continuously compounded zero-rate for the projection period or option expiry period.
3. If prompted, enter allocated expenses and tax to be added to the pure option price.
4. If prompted, enter profit percentage to be loaded to the calculated sum of pure option price and dealing expenses and tax. If the profit loading is x and the sum of pure option price plus expenses and tax is P, then the final price will be calculated as (1 + x)*P.It is important to note that valuation is done from a dealer/broker's perspective. The profit-charge is charged by the dealer/broker.
5. If prompted, enter option strike price.
6. If prompted, enter cash-or-nothing option contingent cash payment.
7. Enter the initial prices of indicated share price variables.
8. Enter the continously compounded dividend yields of indicated share price variables. The continously compounded dividend yields together with discrete dividends, and known dividend yields, enable any dividend payment patterns to be accomodated in the pricing model.
9. Enter the annualised volatilities of indicated share price variables.
10. Enter discrete dividend values and their timing, and zero rates of dividend timing periods for indicated underlying share price variables.
11. Enter known dividend yield values and their timing for indicated underlying share price variables.
12. Click the submit button and this will take you to the output display page.

Output display page

1. You can view pricing model output together with input parameters you entered.
2. At the bottom of the page you can click on the button to create database record for the current model output. This will take you to the create database record page where you should click on the create button to create the database record.
3. After clicking on the create button to create the database record, you will be taken to the database records view page, where you can scroll vertically or horizontally to view database records including the one you just created.
4. You can filter database records according to the currency of valuation using the filter box. You can click on the details link on the extreme right of a particular database record, this will take you to the particular database record details page.
5. Click on the graph link to view option price frequency distribution at expiry. The graph shows a relatively high frequency at zero consistent with the option pay-off structure. You can also choose plot options to view the underlyin shares' price distribution at expiry.