ABSTRACT
It will be interesting to see the impact of the different calibration methods studied in Chapter 3 on the prices of different derivative products. In this chapter we consider derivative instruments of European type in a slightly generalized sense. We speak of a European option when the cash-flows at prespecified exercise dates (standard European product), or at a random date (stopping time) which is explicitly specified in the option contract.1 Clearly, all European style products in this sense can be evaluated by straightforward Monte Carlo simulation. In the next subsections we introduce some popular exotic derivative products. We will consider all these products with respect to a Libor model in the spot Libor measure given by SDE (2.1). From Section 1.2.1 it is clear how to switch to a Libor SDE in some other numeraire measure.
