Chapter 18. Portfolio Valuation
Price is what you pay. Value is what you get.
— Warren Buffet
By now, the whole approach for building the
DX derivatives analytics library—and its associated benefits—should be rather clear. By strictly relying on Monte Carlo simulation as the only numerical method, we accomplish an almost complete modularization of the analytics library:
The relevant risk-neutral discounting is taken
care of by an instance of the
- Relevant data
Relevant data, parameters, and other input are
stored in (several) instances of the
- Simulation objects
Relevant risk factors (underlyings) are modeled as instances of one of three simulation classes:
- Valuation objects
Options and derivatives to be valued are modeled as instances of one of two valuation classes:
One last step is missing: the valuation of possibly complex portfolios of options and derivatives. To this end, we require the following:
- Every risk factor (underlying) is modeled only once and potentially used by multiple valuation objects.
- Correlations between risk factors have to be accounted for.
- An options position, for example, can consist of certain multiples of an options contract.
However, although we have in principle allowed (and even required) providing a currency for both simulation ...