This course initially presents standard topics in simulation including random variable generation, variance reduction methods and statistical analysis of simulation output. The course then addresses the use of Monte Carlo simulation in solving applied problems on derivative pricing discussed in the current finance literature. The technical topics addressed include importance sampling, martingale control variables, stratification, and the estimation of the "Greeks." Application areas include the pricing of American options, pricing interest rate dependent claims, and credit risk. Prerequisite: Probability 46-921, Statistical Inference 46-923, Statistical and Machine Learning Methods for Financial Data 46-926, Stochastic Calculus I 46-944, Options 46-973.
Lecture: 100min/wk and Recitation: 50min/wk