Skip to content
All library documents

How Forward Curves Enter Monte Carlo Derivatives Pricing

Article Quant Q&A · Author: algebruh
Read the original

Summary

The document asks where forward prices can enter a Monte Carlo derivatives-pricing workflow. It describes a system that accepts calibration instruments, a model choice, initial underlying levels, a yield curve, and a forward curve. The follow-up clarifies that the forward curve is not passed directly: a repo curve is supplied, constructed by bumping the yield curve.

The question points to the relationship between financing assumptions, yield and repo curves, and the forward levels used to initialize or evolve underlyings in a pricing model. However, the document contains no answer explaining how the curve is used in calibration, drift specification, or discounting, and gives no particular model or asset class. It is best read as a prompt for investigating curve inputs in Monte Carlo pricing, not as a complete account of the pricing pipeline. The appropriate role of the repo-derived forwards depends on the model’s conventions and the underlying’s carry assumptions.

Key ideas

  • The document asks how a forward price curve can be used in Monte Carlo derivatives pricing.
  • Its described workflow includes calibration instruments, a model, initial underlying levels, and a yield curve.
  • A repo curve is supplied instead of the forward curve directly, and is described as a bumped yield curve.
  • The text does not explain how the curve affects model drift, calibration, or discounting.

Tags

Derivatives pricingExecutionFixed income
Full text
# Why would one need forward prices to perform derivatives pricing?


# Why would one need forward prices to perform derivatives pricing?












I am trying to understand the purpose of inputs the software of my company is using. Amongst others it needs calibration instruments, a model type, initial values of the respective underylings and a yield curve. Furthermore one can input the forward price curve of the respective underlyings. The pricing of derivatives is done by Monte Carlo. Where in the pricing pipeline would it be possible/useful to use the forward price curve?

Edit:

The forward curve is not passed directly. Instead a repocurve is passed which is calculated by adding a bump to the yield curve

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.