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Simulation of Profits from Put Options

The document simulates put option payoffs over multiple time periods using randomly generated standard normal variables. It calculates profits over 10,000 periods for 10,000 simulations and plots the distribution of profits for one simulation and the evolution of cumulative profits over time. The plot shows it can take many periods before cumulative profits go negative.

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Alain-Philippe Fortin
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48 views2 pages

Simulation of Profits from Put Options

The document simulates put option payoffs over multiple time periods using randomly generated standard normal variables. It calculates profits over 10,000 periods for 10,000 simulations and plots the distribution of profits for one simulation and the evolution of cumulative profits over time. The plot shows it can take many periods before cumulative profits go negative.

Uploaded by

Alain-Philippe Fortin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

clc;

clear;

S=10; %number of simulations


T=10000; %number of periods
K=0.5; %exercise price
N=10000; %number of put options to sell each period
Price=K*normcdf(K)+ exp(-K^2/2)/sqrt(2*pi); % fair price of the option

Profits=NaN(T,S);

for s=1:S

X=randn(T,1); %simulating standard normal random variables

Payoff=K-X;
Payoff(Payoff<0)=0; % put options payoff

Profits(:,s)=N*(Price.*ones(T,1)-Payoff); % time series of profits

end

histfit(Profits(:,1)) %Example of profits distribution


plot(cumsum(Profits)) %Evolutition of cumulative profits

The plot shows that it can take many periods before going bust.
4.

clc;
clear;

%Simulating Cauchy variates using probability integral transform


u=rand(1000);
lambda=2;
X=lambda*tan(pi.*(u-0.5));

m=mean(X);

histfit(m)

[h,p,jbstat,critval] = jbtest(m)

h=

p=

1.0000e-03

jbstat =

2.3811e+07

critval =

5.9282

Thus we reject the normal distribution at all levels of confidence.

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