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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | A Comparison between Monte Carlo Methods and Finite Difference Methods for Structured Products: Application to the Target Accumulation Redemption Note in Asian Markets |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 45 |
| Date | 2018 |
| Abstract Text | Target Accumulation Redemption Note (TARN) is a structured product with a path dependent payoff. It pays periodic coupons based on the performance of the underlying asset and can be knocked out if the accumulated amount reaches a target. Given the complexity, TARN is typically evaluated by a Monte-Carlo method. In PDE, its features require the accumulated amount to be tracked and therefore introducing an additional dimension. The accumulated amount and the value of TARN jump along this second dimension per coupon event, which requires an interpolation. We explore possible methods to tackle these difficulties in the finite difference method and compare our implementation with a quasi-Monte-Carlo method. The results provide strong support for the finite difference method, especially in the calculation of Greeks, which is the main need for the pricing. Further extensions for better hedging including the Uncertain Local Volatility model and overhedging are introduced at the end. |
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