quote from ch-16 page 15 Model(2) "If future projected balance sheets themselves require stochastic calculations, this can present significant modelling challenges and might necessitate the use of approximations such as closed form solutions." what are these approximations and closed form solutions?
http://mathworld.wolfram.com/Garman-KohlhagenFormula.html is a closed from solution to the expected discounted value of european optio payoffs. Basically formula for a the value of a derivative vs risk-neutral montecarlo. Approximations could be via: - portfolio replication (try and find a set of derivatives that approximate value of contract and which have closed form formula. Use output of 1st esg as input to formulae) - proxy functions. (run monetcarelo valutoin with lots of different sensitivities and approximate a closed form formula by regression)
