GROUP 05 June 5, 2021

BOND VALUATION

WITH EMBEDDED

OPTIONS
APOLINAR, WILLIANE FAITH

CASTRO, JOYCE

DERILO, NJ SIBBALUCA

HUMIWAT, ESTELLE DAIL

OROTEA, STEPHANIE
 LATTICE MODEL

It's an idea that a current value of stock, commodities or interest rate may change to
one of the two possible options, whether it is an up move or down move value over the
derivative time.
A lattice-based model is used to value derivatives, which are financial instruments that
derive their price from an underlying asset. Assumes that the underlying asset(i.e.
Stock) can move up or down
Lattice models employ binomial trees to show the different paths the price of an
underlying asset might take over the derivative's life.
 MONTE CARLO

VALUATION SIMULATION MODEL

It was developed first by Stanislaw Ulam in the 1940s.

This method was named after a Casino named, Monte Carlo Casino in Monaco because of the
randomness of outcomes which is important in games such as a dice or roulette which is essential
in Monte Carlo simulations.
Monte Carlo Valuation Simulation model is also known as the multiple probability simulation.
It is defined as a model and a probability analysis used to predict the probability of different
results when intervention of random variables is present.
This model relies on the repetitive simulation of random samples to achieve numerical results as a
basis of decisions. An example of this is the assigning of multiple different values to random and
unknown variables which achieves numerous results and then averaged to acquire an estimate.
 Value at Risk- Monte Carlo two security
Seed Value
Literation 0.02
1 0.08 51 0.10
2 0.11 52 0.07
3 0.18 53 0.04
4 0.02 54 0.00
5 -0.02 55 0.10
6 0.15 56 0.20
7 0.10 57 0.03
8 0.03 58 -0.05
9 0.10 59 0.05
10 0.11 60 0.15
11 0.11 61 0.16
12 0.00 62 0.13
13 0.16 63 0.05
14 0.14 64 0.16
15 0.04 65 -0.05
16 0.02 66 -0.02
17 0.16 67 0.14
18 0.03 68 -0.01
19 0.06 69 0.18
20 0.07 70 0.05
21 0.06 71 0.07
22 0.04 72 0.08
23 0.13 73 0.12
24 0.07 74 -0.13
25 0.10 75 0.20
26 0.13 76 0.01
27 0.05 77 0.11
28 0.00 78 -0.05
29 0.23 79 0.00
30 -0.03 80 0.03
31 0.02 81 0.03
32 0.05 82 0.10
33 0.08 83 0.09
34 0.01 84 0.10
35 0.05 85 0.01
36 0.08 86 0.10
37 -0.02 87 -0.01
38 0.07 88 0.01
39 0.14 89 0.18
40 0.19 90 0.02

=portfolio value * percentage loss 41

42
-0.11
-0.04
91
92
0.02
0.03
43 0.01 93 0.10
44 0.09 94 0.03

=1-PERCENTILE(seed value,VaR Monte Carlo)

45 0.06 95 0.05
46 0.00 96 0.04
47 0.10 97 0.19
48 0.12 98 0.12

:
Check Excel file for calculation
49
50
0.14
0.28
99
100
0.09
0.16

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 REFERENCES:

https://youtu.be/JeY4Bq1F-8Q
https://www.investopedia.com/terms/l/lattice-model.asp
https://www.investopedia.com/terms/m/montecarlosimulation.asp
https://www.youtube.com/watch?v=zrqI-NbZSj0