Executive Summary
I decided to be an actuary when I first came to
Brigham Young University. An actuary is someone who utilizes advanced knowledge
on Mathematics, Business and Economics to manage risk. An actuary prices,
validates, valuates and designs products for insurance companies and consulting
firms. In order to be certified, an actuary takes a number of actuarial exams
throughout his school life and career. I have been preparing for Exam MFE,
Models of Financial Economics recently. This exam involves the knowledge of
theoretical basis of financial models. A big part of it is to price call and
put options. I found it sometimes hard to calculate the answers fast and
accurately because of the complex mathematical formulas that we need to
memorize. Therefore, I decided to make a handy tool for actuaries and exam
candidates to come up with the answers more efficiently. The binomial option
pricing model, Black-Scholes formula model and the Monte Carlo valuation method
are included in this tool because of the extensive usage of these methods.
The Binomial Trees model assumes that the price
of a stock can move up or down only by a specified amount. Therefore, we can
determine a no-arbitrage price for the corresponding options.
The Black-Scholes model is one of the most
well-known options pricing models in the world. It was developed in 1973 and is
widely used in the financial world to calculate the theoretical price of
European put and call options.
Monte Carlo valuation is an empirical method.
It is used to value a derivative by generating random lognormal numbers and the
derivative values from the lognormal numbers using the model. Then, we can set
the price of the derivative to the average of the generated values.
I truly believe that this actuarial calculation
tool will enhance the speed of the calculations and minimize the mistakes the
human minds make.
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