Modern pricing models Essay Example | Topics and Well Written Essays - 250 words

Modern pricing models - Essay Example In essence, MAPM is the foundation for picking an effective or set of pricing models by a firm. In this essay, the researcher purposes to uncover various modern pricing models (MPM) and showcase how useful they are for a particular company based on their financial application and compare each model’s use with the Jump Diffusion Models for options as well as evaluate the volatility smile. Such MPM as Geometric Brownian motion (GBM), Merton Model, Jump Diffusion Model for Option, Heston Model, and Bates Model will form the bedrock of this discussion. In every financial modeling for pricing options, the main purpose of applying the financial model is through the determination of correct prices after evaluating a number of generated predictions. Similarly, the same case applies to the geometric Brownian motion model, which is an assumption of stock price behavior used by various models through simulations to determine the future prices of stock, especially in the options and stock prices for investors. As such, investors get to learn how best to place their investments judging from the future expected price changes of a given stock price or of an option. A geometric Brownian motion (GBM), or an exponential Brownian motion, refers to a stochastic process that runs continuously over time in which case the logarithm of the randomly varying quantity follows a Wiener process, or the Brownian motion with a drift. The Brownian motion is a significant example of the stochastic processes that satisfy a stochastic differential equation (SDE). Most applications of Brownian motion incorporate, in particular, mathematical finance, especially in consideration of the model stock prices, such as is the case with Black-Scholes model. As such, the geometric Brownian motion is a core building block of modern finance. This is particularly in the case of the Black Scholes model whereby the underlying stock price is assumedly in line with the principles and

CASE STUDY Coursework Example | Topics and Well Written Essays - 750 words

CASE STUDY - Coursework Example It was during this bidding that Preston realized the inefficiency of their control charts. HP personnel compared their own control charts with Preston’s and found the later to be lagging. At Preston the employees were only working to meet specifications. Hence, this helped in identifying the underlying problem in the plant. The third significant event responsible for adoption of quality principles was the acquisition of the plant by Rendall. Rendall acquired the plant considering it to be a turnaround opportunity. However, the company was disappointed to find the inefficient processes and poor productivity levels at the plant. Moreover, without the Vector project, it was going to be difficult for the plant to survive. This need for urgency was a big factor in motivating Tom and other employees at Preston to adopt quality based principles. The fourth significant event was the meeting of Tom Branton with HP personnel in Chicago in June, 2000. It was in this meeting that Tom actually realized the problems in their control charts. HP people compared Preston’s control charts with their own and made Tom aware of the issues. Tom realized that HP was utilizing Preston’s data more effectively than they themselves were. This event acted as a trigger for the quality drive. The last event which acted as a nail in the coffin was the decision of not awarding the Vector project to Preston in September, 2000. Rendall almost decided to shut down the plant. However, Rendalll was taken into confidence by Preston’s management team. This was the point where the real turnaround began. The basic philosophy which Preston used in its quality program was to ensure that the plant would not operate till the process is in a state of control. Earlier the employees were under dilemma in case the process was not in control. They would bear the brunt both for low productivity and for producing defective products when