Monte Carlo pricing of Exotic Options in F#

I’ve recently completed all exercises for the MOOC Monte Carlo methods in Finance, ran by the University of Madrid on Iversity. The course was excellent, both in its content and delivery.

The course started off by refreshing probability theory (cdf, pdf etc) and quickly moved onto generating random numbers, Brownian motion and stochastic differential equations followed by the pricing of options and calculating risk.
The final week’s homework is on the Monte Carlo calculation of a portfolio’s risk, using copulas with Student’s t distribution, but as that week’s homework is still running I’m blogging about the penultimate week’s homework.

This homework is about pricing path dependent options, and demonstrating how using a control variate can provide a better result for the same number of iterations (better meaning less error, i.e. with a smaller standard deviation). The homework further shows that when pricing a barrier
option, using an up-and-out option as the control variate produces better results than using a European option as the control variate.

The course delivery was extremely slick. The videos were filmed specially, this wasn’t a rehashing of a lecture in front of students (as seems to happen in some other online courses). The lectures were short, and to the point, managing to cram a lot of information in with zero fluff. I really appreciated this as I was watching on a daily commute.

The assessments were by multiple choice question, but with only one attempt, so it did end up actually feeling like a challenge. The questions were a mixture of maths and coding, with the balance moving more towards coding as the weeks went on.
The code was delivered in Matlab, which I had to get reacquainted to after a decade break. The main downside I found is that I ended up doing a fair bit of copy-paste coding, so completed some of the homeworks in .NET instead. I personally found the coding easy, and found the maths more challenging (in a good way).

Now, for the code – the F# code is available here: https://gist.github.com/taumuon/11302896

Apart from the Monte Carlo code, the fact that in F# all functions are in the curried form means that composing the payoff functions using partial function application is beautiful. This would be lambda hell to replicate in C#.

If this course runs again I’d wholeheartedly recommend it.

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