Mersenne twister: a 623-dimensionally equidistributed uniform pseudo-random number generator
ACM Transactions on Modeling and Computer Simulation (TOMACS) - Special issue on uniform random number generation
Simulation-based pricing of mortgage-backed securities
WSC '04 Proceedings of the 36th conference on Winter simulation
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A delivery option exists in mortgage-backed security market, which has not been considered in existing mortgage pricing simulation literature. We explain the delivery option in the "To Be Announced" trade. We discuss how the presence of the delivery option effects the use of the standard pricing simulation technique. This technique uses a risk neutral interest rate simulation with a prepayment option model to recover a price which is an expectation over the possible rate outcomes. The simulation technique uses Monte Carlo integration with a suitable selected pseudo or quasi-random sequence. To recover market prices a spread term called the "Option Adjusted Spread" is required. We see that multiple simulations are required to explore the full structure of the delivery option but suggest how to use one simulation to approximate pricing even when the delivery option is present.