[R-SIG-Finance] Option valuation for arbitrary distribution using monte carlo simulation

[msalese]

Hi again guys,
Let me say that (it's what I see looking at data) if you sample at 1 day or
less, 
log return of financial instruments are not normal so I think you should use
the distribution that best fit this situation.
May be stable it's not the best so you can decide to use some normal mixture
to fit fat tail behavior.
The point is: how do you look at option ?
Are you an hedger or a risk taker (retail trader) ?
It's my experience that as risk taker it's better to have some pdf that let
you build very extreme scenarios and then plan the option strategy to
protect you from this unlikely situation but not impossible.

The interesting think is that R give you the possibility to use different
pdf so write the code to price with MC in a such way to 
separate the innovation function from pricing option-chain function, than
change the innovations pdf and look what happen, it's the best school :
experiment yourself.


 


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