@RISK Quick Tips: Asset Price Random Walks and Options Valuation.

@RISK risk modeling software is used for a wide variety of applications in financial risk analysis forecasting, investments, and banking. This model is one example of how @RISK can help in risk analysis decision making.

Models of the prices of assets (stocks, property, commodities) very often assume a random walk over time, in which the periodic price changes are random, and in the simplest models are independent of each other. The future price level of the asset may result in some contract or payoff becoming valuable, such as in the case of financial market options. In these cases, the value of the contract (contingent payment or option) is calculated as the average discounted value of the future payoff. In the special case of European options on a traded underlying asset, the value calculated from the simulation may be compared with mathematical formulas that analytically provide the valuation, such as the Black-Scholes equation. In many more complex cases, the pertinent analytic formulas may be unknown or very complex to derive, and one may wish to rely on simulation techniques. This particular model compares the average simulated payoff for European Call and Put options with the Black-Scholes valuation.

» Download the example: AssetPrices.Options.BS.Multi.xls

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