hard · Quantitative Finance
When pricing a multi-asset option using a Monte Carlo simulation with Cholesky decomposition, the standard error of the resulting price is $0.25 for M = $10,000.
If the correlation between the assets increases, how does the standard error change if the individual asset volatilities remain constant?
- It remains unchanged, as SE only depends on M and individual volatilities.
- It increases, because the variance of a sum increases with correlation.
- It decreases, because higher correlation makes the system more deterministic.
- It increases or decreases depending on whether the option is a Call or a Put.
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