Options and Gtees (under Pillar1)

Discussion in 'SA1' started by LastMile, Aug 25, 2017.

  1. LastMile

    LastMile Member

    Whats the difference between market consistent simulation and stochastic analysis?

    Thanks for your help with this.
     
  2. Sarah Byrne

    Sarah Byrne ActEd Tutor Staff Member

    Hi LastMile

    It might help to read the core reading here as "market-consistent (simulation and stochastic) analysis". They are both trying to achieve the same thing, running various market-consistent scenarios in order the value the option/guarantee.

    For a simulation approach, the inputs would be varied in a less formal way than for stochastic modelling. For example, for investment returns, the risk-free rate will stay the same but the volatility of returns will vary for each "simulation" and we could then take an average (straight or weighted) of these different scenarios.

    Hope this helps.
    Sarah
     
  3. LastMile

    LastMile Member

    Thanks Sarah!
     

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